Temporal Resolution of Uncertainty, the Investment Policy of Levered Firms and Corporate Debt Yields
48 Pages Posted: 3 Nov 2008
There are 3 versions of this paper
Temporal Resolution of Uncertainty, the Investment Policy of Levered Firms and Corporate Debt Yields
Temporal Resolution of Uncertainty, the Investment Policy of Levered Firms and Corporate Debt Yields
Temporal Resolution of Uncertainty, the Investment Policy of Levered Firms and Corporate Debt Yields
Date Written: March 2002
Abstract
This paper attempts to link the agency literature (concerned with the fact that tensions between bondholders and shareholders may trigger suboptimal investment decisions) with the one dealing with temporal resolution of uncertainty (TRU). We consider here how the speed of resolution of the uncertainty characterizing the firm's operations affects the risk-shifting behavior of a shareholder-aligned manager. It is assumed that investors are risk neutral and that the return on the risky technology is normally distributed. It is shown that the speed of TRU affects monotonically the extent of risk shifting as well as bond yields, even after optimal contracts mitigating deviations from the first-best investment policy have been written. In particular, the optimal investment-restricting covenant is endogenously characterized. Empirical implications are derived and discussed.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Leverage and Growth Opportunities: Risk-Avoidance Induced by Risky Debt
By José Almeida Brito and Kose John
-
Leverage and Growth Opportunities: Risk-Avoidance Induced by Risky Debt
By José Almeida Brito and Kose John
-
Control Rights and Maturity: The Design of Debt, Equity, and Convertible Securities
-
Temporal Resolution of Uncertainty and Corporate Debt Yield: An Empirical Investigation
-
Contingent Control Rights and Managerial Incentives: The Design of Long-Term Debt
-
Temporal Resolution of Uncertainty, the Investment Policy of Levered Firms and Corporate Debt Yields
By Alexander Reisz and Kose John
-
Temporal Resolution of Uncertainty, the Investment Policy of Levered Firms and Corporate Debt Yields
-
Firm Maturity and the Pecking Order Theory
By Laarni T. Bulan and Zhipeng Yan