The dynamics of investment, payout and debt
The Review of Financial Studies
Oxford University Press
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Lambrecht, B., & Myers, S. (2017). The dynamics of investment, payout and debt. The Review of Financial Studies, 30 (11), 3759-3800. https://doi.org/10.1093/rfs/hhx081
We develop a dynamic agency model of a public corporation. Managers underinvest be- cause of risk aversion. They smooth rents and payout. They do not exploit interest tax shields fully. The interactions of investment, debt and payout decisions can change dras- tically depending on managers’ preferences. Managers with power utility set investment, debt and payout proportional to the firm’s net worth, generating a constant (possibly negative) net debt ratio. With exponential utility, investment decisions are separated from decisions about debt and payout. More profitable firms become cash cows and less profitable firms accumulate debt, as in a pecking order model.
payout, investment, financing policy, agency
Lambrecht gratefully acknowledges financial support from the Cambridge Endowment for Research in Finance (CERF).
External DOI: https://doi.org/10.1093/rfs/hhx081
This record's URL: https://www.repository.cam.ac.uk/handle/1810/263815