Temporal Resolution of Uncertainty, the Investment Policy of Levered Firms and Corporate Debt Yields

64 Pages Posted: 11 Nov 2008

See all articles by Alexander Reisz

Alexander Reisz

Office of the Comptroller of the Currency

Multiple version iconThere are 3 versions of this paper

Date Written: October 1999

Abstract

This paper attempts to link the agency literature (concerned with whether debt will trigger underinvestment incentives or risk-shifting behavior) with the one dealing with temporal resolution of uncertainty. To the best of our knowledge, apart from one article by John and Ronen (1990), there is no research article linking the two literatures. We are concerned here with how the product/input market influences deviations from the optimal investment policy, in particular to what extent the speed of resolution of uncertainty of the industry in which a given firm operates affects the risk-shifting behavior of a shareholder-aligned manager. We assume that investors are risk neutral and that the return on the risky technology is normally distributed. It is then shown that the pattern of temporal resolution of uncertainty monotonically affects risk shifting as well as bond yields, even after contracts mitigating deviations from optimal investment policy have been written; empirical implications are derived and discussed.

Suggested Citation

Reisz, Alexander, Temporal Resolution of Uncertainty, the Investment Policy of Levered Firms and Corporate Debt Yields (October 1999). NYU Working Paper No. FIN-99-044. Available at SSRN: https://ssrn.com/abstract=1297800

Alexander Reisz (Contact Author)

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States
(202) 874 6167 (Phone)
(202) 874 5394 (Fax)

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