Working Paper: CEPR ID: DP2504
Authors: Jean Paul Decamps; Antoine Faure-Grimaud
Abstract: This paper analyses the incentives of the equityholders of a leveraged company to shut it down in a continuous time, stochastic environment. Keeping the firm as an ongoing concern has an option value but equity and debt holders value it differently. Equity holders' decisions exhibit excessive continuation and reduce the firm's value. Using a compound exchange option approach, we characterize the resulting agency costs of debt, derive the ?price? of these costs and analyse their dynamics. We also show how agency costs can be reduced by the design of debt and the possibility of renegotiation.
Keywords: debt; dynamic agency costs; excessive continuation
JEL Codes: G13; G30; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Equity holders' excessive continuation (G32) | Firm value (G32) |
| Closer the firm gets to debt maturity (G33) | Agency costs (G39) |
| Debt design and renegotiation processes (H63) | Agency costs (G39) |
| Coupon debt structure (G12) | Firm value (G32) |