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dc.contributor.authorMyklebust, Tor Åge
dc.date.accessioned2013-03-12T12:34:55Z
dc.date.available2013-03-12T12:34:55Z
dc.date.issued2012-06
dc.identifier.issn1500-4066
dc.identifier.urihttp://hdl.handle.net/11250/164197
dc.description.abstractPerformance sensitive debt (PSD) contracts link the paid coupon to a measure of firm performance. PSD contracts are widely used, especially as corporate bank loans. In a model where a firm has assets in place and the opportunity to invest in a growth option, I analyze how PSD affects equityholders' investment and financing incentives. With no pre-existing debt I show that PSD reduces a given firm's optimal leverage, indicating that in this case PSD partially solves potential future conflicts related to debt overhang. With debt in place I show that PSD financing magnifies equityholders' risk-shifting incentives, proving that in this case PSD is an inefficient financing tool. My conclusion questions the hypothesis that PSD is used to prevent asset substitution. When debt overhang creates problems of underinvestment I show that PSD financing partially resolves these inefficiencies. My conclusions are partially based on numerical analysis, but they are robust to changes in input parameters.no_NO
dc.language.isoengno_NO
dc.publisherNorwegian School of Economics. Department of Finance and Management Scienceno_NO
dc.relation.ispartofseriesDiscussion paper;2012:7
dc.subjectperformance sensitive debtno_NO
dc.subjectgrowth optionno_NO
dc.subjectdebt overhangno_NO
dc.subjectasset substitutionno_NO
dc.subjectunderinvestmentno_NO
dc.titlePerformance sensitive debt - investment and financing incentivesno_NO
dc.typeWorking paperno_NO
dc.subject.nsiVDP::Social science: 200::Economics: 210::Business: 213no_NO


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