Optimal Investment and Capital Structure with Stock Market Feedback

Caio Machado and Ana Elisa Pereira ()

No 527, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: This paper studies optimal investment and capital structure policies when firms learn from financial markets. We propose a tractable model of feedback with imperfect information aggregation and allow the firm to choose its capital structure and investment policy in a previous stage. Firms may benefit from committing to time-inconsistent investment strategies that feature more risk taking, which can be implemented by simple managerial compensation schemes. Issuing debt can increase market informativeness and firm value. Under the optimal capital structure, the time inconsistency of investment policies disappears. We derive empirical predictions regarding the relationship between market frictions, managerial compensation and capital structure.

Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.economia.uc.cl/docs/doctra/dt-527.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:527

Access Statistics for this paper

More papers in Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile. Contact information at EDIRC.
Bibliographic data for series maintained by Jaime Casassus ().