Abstract
Abstract We develop a dynamic capital structure model to study how agency conflicts between managers and shareholders affect the joint determination of financing and investment decisions. We show that there are two agency conflicts with opposing effects on a manager’s choice of investment: first, the consumption of private benefits channel leads managers not only to choose a lower optimal leverage, but also to underinvest, and second, compensation linked to firm size may lead managers to overinvest. We fit the model to the data and show that the average firm slightly overinvests, younger CEOs invest more than older ones, while CEOs with longer tenure overinvest more than CEOs with shorter tenure. (JEL G12, G31, G32)
Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
