Investment Policy, Financial Policies, and the Control of Agency Conflicts
38 Pages Posted: 12 Sep 2002
Date Written: October 2002
This paper analyzes the interaction among investment, financing and hedging policies in a model where managers derive perquisites from investment. In our model, both hedging and financing policies affect a firm's investment policy, thus changing costs of over- and underinvestment. The paper demonstrates that combinations of financing and hedging policies typically better control deviations from value-maximization in investment policy than either of these policies taken individually. We show that this implies that when firm value depends on the firm's investment policy, shareholders generally have incentives to maintain the firm's hedging policy once debt has been issued. The paper also examines managers' risk-shifting incentives and provides an analysis of the benefits associated with risk management in different economic environments.
Keywords: Investment Policy, Financing Policy, Risk Management
JEL Classification: G12, G31, G32
Suggested Citation: Suggested Citation