Journal of Financial Economics Vol. 76 No. 3 2005
Interactions of corporate financing and investment decisions: The effects of agency conflicts
Abstract
We examine interactions between flexible financing and investment decisions in a model with stockholder–bondholder conflicts over investment policy. We find that financial flexibility encourages the choice of short-term debt thereby dramatically reducing the agency costs of under- and overinvestment. However, the reduction in agency costs may not encourage the firm to increase leverage, since the firm's initial debt level choice depends on the type of growth options in its investment opportunity set. The model has a number of testable predictions for the joint choice of leverage and maturity, and how these choices interact with a firm's growth opportunities.
- DOI
- 10.1016/j.jfineco.2004.06.012
- Volume
- 76
- Issue
- 3
- Pages
- 667-690
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref