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Investment and financing choices by time-inconsistent managers

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  • Gan, Liu
  • Xia, Xin
  • Chen, Yifei

Abstract

This paper provides an analytically tractable continuous-time model in which a time-inconsistent manager can divert part of the firm’s cash flows as private benefits at the expense of outside shareholders. We endogenously determine the investment scale, investment threshold, optimal coupon and default threshold under managerial discretion. We demonstrate that time-inconsistent managers each have a trade-off between the timing and scale of investment.

Suggested Citation

  • Gan, Liu & Xia, Xin & Chen, Yifei, 2018. "Investment and financing choices by time-inconsistent managers," The North American Journal of Economics and Finance, Elsevier, vol. 46(C), pages 29-48.
    • Handle: RePEc:eee:ecofin:v:46:y:2018:i:c:p:29-48
    DOI: 10.1016/j.najef.2018.03.008
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    More about this item

    Keywords

    Agency conflicts; Investment; Financing policy; Time inconsistency;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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