Jun 14, 2013
from 11:00 AM to 12:15 PM
|Contact Name||M. Jamasb|
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We present a dynamic agency model of the financial management of a mature corporation operating in perfect financial markets. Managers implement a joint inter-temporal strategy for investment, borrowing, payout and managerial rents. Corporate governance forces payout and rents to move in lockstep. The change in borrowing must be the residual decision: there is no feedback from the borrowing decision to decisions about investment and payout plus rents. Managers do not rebalance capital structure, so shocks to debt levels persist. Managers under-invest, compared to the value-maximizing optimum, because of risk aversion. They smooth rents and payout. These results are derived for any risk-averse managerial utility function and for any stochastic process for profitability. We also present closed-form solutions for a specific utility function and stochastic process. Our model generates empirical predictions that differ from conventional agency models, which usually consider investment, borrowing, payout or rents separately, and from dynamic models based on taxes and financing frictions.
The paper is co-authored with Bart M. Lambrecht