The dynamics of investment, payout and debt
Accepted version
Peer-reviewed
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Authors
Lambrecht, BMAC
Myers, SC
Abstract
We develop a dynamic agency model of a public corporation. Managers underinvest because 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 drastically 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.
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Keywords
payout, investment, financing policy, agency
Journal Title
The Review of Financial Studies
Conference Name
Journal ISSN
0893-9454
1465-7368
1465-7368
Volume Title
30
Publisher
Oxford University Press
Publisher DOI
Sponsorship
Lambrecht gratefully acknowledges financial support from the Cambridge Endowment for Research in Finance (CERF).