Measuring the Agency Cost of Debt

António S. Mello · John E. Parsons

304 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Corporate Insolvency and Governance Financial Reporting and Valuation Research

Abstract

ABSTRACT We adapt a contingent claims model of the firm to reflect the incentive effects of the capital structure and thereby to measure the agency costs of debt. An underlying model of the firm and the stochastic features of its product market are analyzed and an optimal operating policy is chosen. We identify the change in operating policy created by leverage and value this change. The model determines the value of the firm and its associated liabilities incorporating the agency consequences of debt.

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References

1973The Pricing of Options and Corporate Liabilities 1977Determinants of corporate borrowing 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1985Evaluating Natural Resource Investments 1986Valuation effects of security offerings and the issuance process 1978A Simple Approach to the Valuation of Risky Streams

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