Debt and Managerial Rents in a Real-Options Model of the Firm

47 Pages Posted: 12 Jun 2006

See all articles by Stewart C. Myers

Stewart C. Myers

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

Bart M. Lambrecht

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

Date Written: May 4, 2007

Abstract

We present a theory of capital investment and debt and equity financing in a real-options model of a public corporation. The model assumes that managers maximize the present value of their future compensation (managerial rents), subject to constraints imposed by outside shareholders' property rights to the firm's assets. Absent bankruptcy costs, managers follow an optimal debt policy that generates efficient investment and disinvestment. We show how bankrupcy costs can distort both investment and disinvestment. We also show how managers' personal wealth constraints can lead to delayed investment and increased reliance on debt financing. Changes in cash flow can cause changes in investment by tightening or loosening the wealth constraints. Firms with weaker investor protection adopt higher debt levels.

Keywords: investment policy, financing policy, debt, agency

JEL Classification: G31, G32

Suggested Citation

Myers, Stewart C. and Lambrecht, Bart, Debt and Managerial Rents in a Real-Options Model of the Firm (May 4, 2007). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=908065 or http://dx.doi.org/10.2139/ssrn.908065

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)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Bart Lambrecht (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44-(0)-1223-339700 (Phone)
44-(0)-1223-339701 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
775
Abstract Views
2,598
rank
30,635
PlumX Metrics