Agency conflicts, financial constraints, and dynamic q-theory

Siqi Zhao and Bangru Shi

Economics Letters, 2024, vol. 234, issue C

Abstract: We develop a dynamic q-theoretic model where equity financing is uncertain and investment is delegated to a self-interested manager. We find that agency conflicts generate more volatile investments, and equity financing uncertainty can discipline managerial discretion and mitigate overinvestment issues. The disciplinary effect reduces future liquidation risk, thus weakening the manager’s hedging incentives. Furthermore, more prudent investment alleviates precautionary motives, and shareholders optimally reduce cash holdings to avoid managerial cash diversion. As a result, our finding provides a potential rationale behind the mixed empirical findings on corporate governance and cash holdings.

Keywords: Agency conflict; Financing uncertainty; Investment; Cash holding; Dynamic hedging (search for similar items in EconPapers)
JEL-codes: E22 G32 G34 G35 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:234:y:2024:i:c:s016517652300527x

DOI: 10.1016/j.econlet.2023.111501

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