Asset Substitution, Debt Pricing, Optimal Leverage and Maturity

Ericsson, Jan

doi:10.2139/ssrn.237529

Cited by 59 publications

(50 citation statements)

References 22 publications

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“…They find that financing flexibility encourages the use of short term debt and significantly reduces agency costs of investment distortions. Other related works on asset substitution are Mello and Parsons (1992), Mauer and Triantis (1994), Parrino and Weisbach (1999), Ericsson (2000), Décamps and Faure-Grimaud (2002), Mauer and Sarkar (2005).…”

Section: Introductionmentioning

confidence: 99%

Switching to a poor business activity: optimal capital structure, agency costs and covenant rules

Décamps

Djembissi

2006

Annals of Finance

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Section: Introductionmentioning

confidence: 99%

Switching to a poor business activity: optimal capital structure, agency costs and covenant rules

Décamps

Djembissi

2006

Annals of Finance

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“…Leland, 1998, Ericsson, 2000, Titman and Tsyplakov, 2002, Mauer and Sarkar, 2005, Childs et al, 2005, being particularly relevant the differences with Leland (1998), since the author do not take into account operational component of the agency costs. The differences are most likely linked with the time constraints for the investment option and the concession, because as the results demonstrate there is a positive relationship between the life of the investment option and of the concession and the agency costs of debt (more pronounced for the case of the life of the concession).…”

Section: Resultsmentioning

confidence: 99%

“…By incorporating agency conflicts it extends on previous work by Mauer and Triantis (1994). It also extends the study of agency conflicts in the context of investment options by considering time constraints, for both the option to delay investment and the subsequent firm, and by embodying to this framework growing investment costs and issuance costs of debt (incorporating in a different environment some of the features of Leland, 1998, Ericsson, 2000and Mauer and Sarkar, 2005. For all these scenarios it analyses the effect of agency conflicts on the investment decisions and optimal debt levels.…”

Section: Introductionmentioning

confidence: 83%

Fixed Life Projects: Agency Conflicts and Optimal Leverage

2008

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In this paper we analyse a model of the conflicts between equityholders and debtholders regarding the optimal exercise moment for investment in a firm whose only asset is a concession contract. This setting reflects the reality of, not only traditional concessions, but also image rights and audiovisual contracts.Our results support the coexistence of two different incentives (overinvestment and underinvestment) in one single type of real flexibility (option to invest). We show how overinvestment incentives clearly dominate underinvestment incentives, in terms of their impact in the option value, and show how they tend to occur at or close to maturity of the investment option. We present competing predictions for the size of the agency costs and optimal debt levels, under different market conditions and for different asset characteristics, and reiterate the impact of the agency conflicts in lowering optimal debt levels. Our results also show how different debt repayment schedules optimize the value of the firm operating the concession, even if in some cases the optimal schedule represents the one more sensitive to agency costs.

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“…See Table 1 for the notation used throughout this paper. Following the modeling of finite maturity debt in Leland (1994b), Leland (1998), andEricsson (2000), we assume that debt has no single explicit maturity date but that a constant fraction m of the outstanding debt matures at any instant of time. Ignoring default and debt repurchase, the average maturity of a debt contract is then 1/m years.…”

Section: The Modelmentioning

confidence: 99%