Corporate Policy Distortions and Indirect Costs of Bankruptcy

Topics:
Investment and Capital Markets
Tags:
Bankruptcy,
Business Operations,
Capital Structures,
Finance,
Investment,
Lehigh University,
Litigation
Source:
Lehigh University

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Overview: Coupled with limited liability, asymmetric information between equity-holders and debt-holders is commonly invoked to explain distorting effects of debt on investment decisions. This paper proposes a continuous-time, intertemporal decision model to investigate the role of bankruptcy risk on policies/activities of a firm in a symmetric information setting. No debt is in place and capital structure is set dynamically just prior to investment. The timing of debt financing and leverage are dependent on value of equity and the riskiness and magnitude of the investment opportunity.

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Format: PDF | Size: 504KB | Date: Nov 2002 | Pages: 21

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