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Agency conflicts, financial constraints, and dynamic q-theory

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  • Zhao, Siqi
  • Shi, Bangru

Abstract

We develop a dynamic q-theoretic model where equity financing is uncertain and investment is delegated to a self-interested manager. We find that agency conflicts generate more volatile investments, and equity financing uncertainty can discipline managerial discretion and mitigate overinvestment issues. The disciplinary effect reduces future liquidation risk, thus weakening the manager’s hedging incentives. Furthermore, more prudent investment alleviates precautionary motives, and shareholders optimally reduce cash holdings to avoid managerial cash diversion. As a result, our finding provides a potential rationale behind the mixed empirical findings on corporate governance and cash holdings.

Suggested Citation

  • Zhao, Siqi & Shi, Bangru, 2024. "Agency conflicts, financial constraints, and dynamic q-theory," Economics Letters, Elsevier, vol. 234(C).
    • Handle: RePEc:eee:ecolet:v:234:y:2024:i:c:s016517652300527x
    DOI: 10.1016/j.econlet.2023.111501
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    References listed on IDEAS

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    More about this item

    Keywords

    Agency conflict; Financing uncertainty; Investment; Cash holding; Dynamic hedging;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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