The Dynamics of Investment, Payout and Debt
56 Pages Posted: 2 Jun 2014
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The Dynamics of Investment, Payout and Debt
Date Written: April 2014
Abstract
We present a dynamic agency model of investment, borrowing and payout decisions by a mature corporation operating in perfect financial markets. Risk-averse managers implement an inter-temporal strategy that maximizes their lifetime utility of managerial rents. They under-invest and smooth payout and rents. Debt is the shock-absorber for operating income and investment. Managers do not rebalance capital structure, so shocks to debt levels persist. Managers implement precautionary savings by paying down debt, even when interest is tax-deductible. We generate empirical predictions that differ from conventional agency models and from dynamic models based on financing frictions.
Keywords: agency, financing policy, investment, payout
JEL Classification: G31, G32
Suggested Citation: Suggested Citation
Stewart C. Myers
Massachusetts Institute of Technology (MIT) ( email )
Sloan School of Management
Cambridge, MA 02142
United States
617-253-6696 (Phone)
617-258-6855 (Fax)
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The Dynamics of Investment, Payout and Debt
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