Journal of Corporate Finance Vol. 16 No. 2 2010
Investment timing, liquidity, and agency costs of debt
open access
Abstract
This paper examines the effect of debt and liquidity on corporate investment in a continuous-time framework. We show that stockholder–bondholder agency conflicts cause investment thresholds to be U-shaped in leverage and decreasing in liquidity. In the absence of tax effects, we derive the optimal level of liquid funds that eliminates agency costs by implementing the first-best investment policy for a given capital structure. In a second step we generalize the framework by introducing a tax advantage of debt, and we show that an interior solution for liquidity and capital structure optimally trades off tax benefits and agency costs of debt.
- DOI
- 10.1016/j.jcorpfin.2010.01.002
- Volume
- 16
- Issue
- 2
- Pages
- 243-258
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref