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Cash management and risk-taking incentives with performance-sensitive debt under stochastic financing conditions

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  • Yao, Yanming
  • Luo, Pengfei

Abstract

We build a model of cash management for financially constrained firm with performance-sensitivity debt (PSD) in a stochastic financing conditions framework. In this model, stochastic financing conditions lead shareholders to have incentives for risk-taking. This paper highlights the implications of PSD on cash management and risk-taking incentives for shareholders. We find that firms with PSD issue equity earlier, and delay payout to shareholders relative to firms with straight debt. In addition, we also discover that larger performance-sensitivity leads shareholders to have stronger risk-taking incentives.

Suggested Citation

  • Yao, Yanming & Luo, Pengfei, 2022. "Cash management and risk-taking incentives with performance-sensitive debt under stochastic financing conditions," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322003282
    DOI: 10.1016/j.frl.2022.103104
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    References listed on IDEAS

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    1. Sarkar, Sudipto & Zhang, Chuanqian, 2015. "Underinvestment and the design of performance-sensitive debt," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 240-253.
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    More about this item

    Keywords

    Cash management; Risk-taking incentives; Performance-sensitivity debt; Stochastic financing conditions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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