Asset Substitution and Debt Renegotiation

Publikation: Konferencebidrag uden forlag/tidsskriftPaperForskningpeer review

Resumé

In a dynamic capital structure model we study whether asset substitution implies
agency costs when the firm initially takes the substitution option into account.
We show that substitution implies agency costs if volatility increases enough. In
this case, debt renegotiation to avoid substitution mitigates the ex ante costs.
However, debt renegotiation decreases the equity holders’ ex post costs implying
that substitution with a modest volatility increase has ex ante effects. Hence,
the possibility of debt renegotiation need not improve ex ante firm value if asset
substitution is allowed for.
OriginalsprogEngelsk
Publikationsdatodec. 2010
Antal sider49
StatusUdgivet - dec. 2010

Citer dette

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abstract = "In a dynamic capital structure model we study whether asset substitution implies agency costs when the firm initially takes the substitution option into account. We show that substitution implies agency costs if volatility increases enough. In this case, debt renegotiation to avoid substitution mitigates the ex ante costs. However, debt renegotiation decreases the equity holders’ ex post costs implying that substitution with a modest volatility increase has ex ante effects. Hence, the possibility of debt renegotiation need not improve ex ante firm value if asset substitution is allowed for.",
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Asset Substitution and Debt Renegotiation. / Flor, Christian Riis.

2010.

Publikation: Konferencebidrag uden forlag/tidsskriftPaperForskningpeer review

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AB - In a dynamic capital structure model we study whether asset substitution implies agency costs when the firm initially takes the substitution option into account. We show that substitution implies agency costs if volatility increases enough. In this case, debt renegotiation to avoid substitution mitigates the ex ante costs. However, debt renegotiation decreases the equity holders’ ex post costs implying that substitution with a modest volatility increase has ex ante effects. Hence, the possibility of debt renegotiation need not improve ex ante firm value if asset substitution is allowed for.

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