Agency and optimal investment dynamics

Peter M. DeMarzo; Michael J. Fishman

doi:10.1093/rfs/hhl004

Agency and optimal investment dynamics

Peter M. DeMarzo, Michael J. Fishman^*

^*Corresponding author for this work

Finance

Research output: Contribution to journal › Article › peer-review

90 Scopus citations

Abstract

Agency problems limit firms' access to capital markets, curbing investment. Firms and investors seek contractual ways to mitigate these problems. What are the implications for investment? We present a theory of a firm's investment dynamics in the presence of agency problems and optimal long-term financial contracts. We derive results relating firms' investment decisions, current and past cash flows, firm size, capital structure, and dividends. Among the results, optimal investment is increasing in current and past cash flow; and optimal investment is positively serially correlated over time (after controlling for investment opportunities). These results hold for a range of agency problems.

Original language	English (US)
Pages (from-to)	151-188
Number of pages	38
Journal	Review of Financial Studies
Volume	20
Issue number	1
DOIs	https://doi.org/10.1093/rfs/hhl004
State	Published - Jan 2007

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

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Agency and optimal investment dynamics

Abstract

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