Investment and capital structure decisions with strategic debt service under asymmetric information

Dandan Song, Pengfei Luo and Jingjing Yang

The North American Journal of Economics and Finance, 2020, vol. 54, issue C

Abstract: This paper examines the agency problem due to manager-shareholder conflicts in a real option framework by incorporating strategic debt service. We show that when the equityholders’ bargaining power is weak, the optimal coupon is larger and the manager overinvests the project relative to the case without renegotiation, while the results are totally opposite when the bargaining power is strong. An increase in equityholders’ bargaining power reduces the manager’s value and the total social value. Especially, the social value can be improved by debt renegotiation when the systematic risk is high, which provides an explanation why Chinese government encourage the market-oriented debt restructuring.

Keywords: Investment and capital structure; Strategic debt service; Manager-shareholder conflicts (search for similar items in EconPapers)
JEL-codes: G11 G32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940818304649

DOI: 10.1016/j.najef.2018.11.001

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