 Leveraged Investments and Agency Conflicts When Prices Are Mean RevertingKristoffer Glover and Gerhard Hambusch () No 314, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney Abstract: We analyse the effect of differing uncertainty assumptions on the costs of shareholder-bondholder conflicts arising from partially debt-financed investments. A partial equilibrium model, valid for a large class of diffusion processes, is developed and then applied to the specific cases of a geometric Brownian motion (GBM) and a mean-reverting (MR) process. This allows for the comparison of the two scenarios and contributes to the ongoing discussion on the effects of mean reversion on investment and financing behaviour. We find that agency costs are much lower under MR dynamics and, through the application of a novel agency cost decomposition, we show that for a high expected growth in future profits (high growth GBM) agency costs are driven mainly by suboptimal financing decisions, as opposed to suboptimal (default and investment) timing decisions. The situation is reversed for lower growth assumptions and for an increase in the speed of mean reversion. Our results on the components and drivers of agency costs are valuable to both policy makers and regulators alike. Keywords: investment; real option; mean reversion; agency conflicts (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:314 Access Statistics for this paper More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC. |
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