Econometrica Vol. 76 No. 2 2008
Investment Reversibility and Agency Cost of Debt
Abstract
Previous research has argued that debt financing affects equity-holders ’ investment decisions, producing substantial inefficiency. This paper shows that the size of this inefficiency depends on the degree of investment reversibility. In a dynamic model of financing and in-vestment, the paper provides an upper bound for the inefficiency pro-duced by debt financing. The upper bound is decreasing in the degree of investment reversibility and is zero when investment is perfectly reversible.
- DOI
- 10.1111/j.1468-0262.2008.00838.x
- Volume
- 76
- Issue
- 2
- Pages
- 437-442
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref