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| Author: | Decamps, J.-P. Faure-Grimaud, A. |
| Title: | Excessive continuation and dynamic agency costs of debt |
| Journal: | European Economic Review
2002 : OCT, VOL. 46:9, p. 1623-1644 |
| Index terms: | COSTS OPTIONS DEBT ANALYTICAL REVIEW |
| Language: | eng |
| 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. Equityholders' decisions exhibit excessive continuation and reduce firm's value. Using a compound exchange option approach, the authors characterise the resulting agency costs of debt, derive the "price" of these costs and analyse their dynamics. The authors also show how agency costs can be reduced by the design of debt. The paper provides a substantial list of references on this subject. |
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