Leveraged investments and agency conflicts when cash flows are mean reverting

Glover, KJ; Hambusch, G

Leveraged investments and agency conflicts when cash flows are mean reverting

Glover, KJ

Hambusch, G

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Publication Type:: Journal Article
Citation:: Journal of Economic Dynamics and Control, 2016, 67 pp. 1 - 21
Issue Date:: 2016-06-01

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Field	Value	Language
dc.contributor.author	Glover, KJ https://orcid.org/0000-0002-1518-3482	en_US
dc.contributor.author	Hambusch, G https://orcid.org/0000-0003-4289-4279	en_US
dc.date.available	2020-05-25T19:23:44Z
dc.date.issued	2016-06-01	en_US
dc.identifier.citation	Journal of Economic Dynamics and Control, 2016, 67 pp. 1 - 21	en_US
dc.identifier.issn	0165-1889	en_US
dc.identifier.uri	http://hdl.handle.net/10453/122113
dc.description.abstract	© 2016 Elsevier B.V.. We analyse the effect of mean-reverting cash flows on the costs of shareholder-bondholder conflicts arising from partially debt-financed investments. In a partial equilibrium setting we find that such agency costs are significantly lower under mean-reverting (MR) dynamics, when compared to the ubiquitous geometric Brownian motion (GBM). The difference is attributed to the stationarity of the MR process. In addition, through the application of a novel agency cost decomposition, we show that for a larger speed of mean reversion, agency costs are driven mainly by suboptimal timing decisions, as opposed to suboptimal financing decisions. In contrast, under the standard GBM assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates.	en_US
dc.relation.ispartof	Journal of Economic Dynamics and Control	en_US
dc.relation.isbasedon	10.1016/j.jedc.2016.03.006	en_US
dc.subject.classification	Economics	en_US
dc.title	Leveraged investments and agency conflicts when cash flows are mean reverting	en_US
dc.type	Journal Article
utslib.citation.volume	67	en_US
utslib.for	1401 Economic Theory	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
utslib.for	1402 Applied Economics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	open_access
pubs.publication-status	Published	en_US
pubs.volume	67	en_US

Abstract:

© 2016 Elsevier B.V.. We analyse the effect of mean-reverting cash flows on the costs of shareholder-bondholder conflicts arising from partially debt-financed investments. In a partial equilibrium setting we find that such agency costs are significantly lower under mean-reverting (MR) dynamics, when compared to the ubiquitous geometric Brownian motion (GBM). The difference is attributed to the stationarity of the MR process. In addition, through the application of a novel agency cost decomposition, we show that for a larger speed of mean reversion, agency costs are driven mainly by suboptimal timing decisions, as opposed to suboptimal financing decisions. In contrast, under the standard GBM assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates.

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http://hdl.handle.net/10453/122113