Dynamic investment and capital structure under manager-shareholder conflict

Takashi Shibata () and Michi Nishihara

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 2, 158-178

Abstract: This paper investigates the interactions between the investment and financing decisions of a firm under manager-shareholder conflicts arising from asymmetric information. In particular, we extend the manager-shareholder conflict problem in a real options model by incorporating debt financing. We show that manager-shareholder conflicts over investment policy increase not only the investment and default triggers but also coupon payments, which lead to a decrease in the equity value. Moreover, given the presence of manager-shareholder conflicts, debt financing increases investment and decreases total social welfare. As a result, there is a trade-off between the efficiency of investment and total social welfare with debt financing. These results fit well with the findings of previous empirical work in this area.

Keywords: Real; options; Debt; financing; Agency; problem; Asymmetric; information (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:2:p:158-178

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