A RATIONALE FOR DEBT MATURITY STRUCTURE AND CALL PROVISIONS IN THE AGENCY THEORETIC FRAMEWORK

A RATIONALE FOR DEBT MATURITY STRUCTURE AND CALL PROVISIONS IN THE AGENCY THEORETIC FRAMEWORK ABSTRACT The agency costs of debt are introduced in this paper to explain the existence of complex financial instruments. Two areas of complexities are discussed in detail: the call provision and the maturity structure of debt. Their existence is rationalized as a means of resolving agency problems associated with informational asymmetry, managerial (stockholder) risk incentives, and foregone growth opportunities. It is also demonstrated that both features of corporate debt serve identical purposes in solving agency problems. Complex financial instruments are required because markets fail to provide complete and costless solutions to the agency problems discussed in the paper. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

A RATIONALE FOR DEBT MATURITY STRUCTURE AND CALL PROVISIONS IN THE AGENCY THEORETIC FRAMEWORK

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Publisher
Wiley
Copyright
1980 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1980.tb02205.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT The agency costs of debt are introduced in this paper to explain the existence of complex financial instruments. Two areas of complexities are discussed in detail: the call provision and the maturity structure of debt. Their existence is rationalized as a means of resolving agency problems associated with informational asymmetry, managerial (stockholder) risk incentives, and foregone growth opportunities. It is also demonstrated that both features of corporate debt serve identical purposes in solving agency problems. Complex financial instruments are required because markets fail to provide complete and costless solutions to the agency problems discussed in the paper.

Journal

The Journal of FinanceWiley

Published: Dec 1, 1980

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