The Dynamics of Investment, Payout and Debt

58 Pages Posted: 21 Oct 2014 Last revised: 29 Jan 2017

See all articles by Bart M. Lambrecht

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 26, 2017

Abstract

We develop a dynamic agency model of a public corporation. Managers underinvest because of risk aversion. They smooth rents and payout. They do not exploit interest tax shields fully. The interactions of investment, debt and payout decisions can change drastically depending on managers' preferences. Managers with power utility set investment, debt and payout proportional to the firm's net worth, generating a constant (possibly negative) net debt ratio. With exponential utility, investment decisions are separated from decisions about debt and payout. More profitable firms become cash cows and less profitable firms accumulate debt, as in a pecking order model.

Keywords: payout, investment, financing policy, agency

JEL Classification: G31, G32

Suggested Citation

Lambrecht, Bart and Myers, Stewart C., The Dynamics of Investment, Payout and Debt (January 26, 2017). Available at SSRN: https://ssrn.com/abstract=2512172 or http://dx.doi.org/10.2139/ssrn.2512172

Bart Lambrecht (Contact Author)

University of Cambridge - Judge Business School ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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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)

National Bureau of Economic Research (NBER)

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