The Underinvestment Problem, Bond Covenants and Insurance

J. R. Garven and R. D. MacMinn

Working Papers from Risk and Insurance Archive

Abstract: This article complements the earlier work by Mayers and Smith (1987) and Schnabel and Roumi (1989) which showed that a property insurance contract could be used to bond subsequent corporate investment decisions. Although these models suggest one possible approach to solving the underinvestment problem, neither model explicitly specifies the economic mechanism(s) required to guarantee that current shareholders receive the maximum possible benefits from solving this problem. We propose a financing-constrained model that not only eliminates underinvestment but also ensures that current shareholders capture the entire agency cost (net of loading) as an increase in value.

Keywords: corporate risk management; underinvestment; agency cost; bonding (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Journal of Risk and Insurance, Vol. 60, No. 4, December 1993, pp. 635-646. This paper was awarded the 1993 Journal of Risk and Insurance Outstanding Shorter Article Award.

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:wop:riskar:011

Access Statistics for this paper

More papers in Working Papers from Risk and Insurance Archive
Bibliographic data for series maintained by Thomas Krichel ().