Excessive continuation and dynamic agency costs of debt

Jean-Paul Decamps and Antoine Faure-Grimaud

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper analyses the incentives of the equityholders of a leveraged company to shut it down in a continuous time, stochastic environment. Keeping the firm as an ongoing concern has an option value but equity and debt holders value it differently. Equityholders' decisions exhibit excessive continuation and reduce firm's value. Using a compound exchange option approach, we characterise the resulting agency costs of debt, derive the "price" of these costs and analyse their dynamics. We also show how agency costs can be reduced by the design of debt and the possibility of renegotiation.

JEL-codes: G13 G30 L10 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2000-03-01
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119106

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