Debt financing and myopia: Cause or consequence?

Noe, Thomas (1995) Debt financing and myopia: Cause or consequence? In: International Symposium on Finance, 10 November, 1995, Seoul National University, Seoul, Korea.

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It is generally agreed that stockholder/bondholder agency conflicts are an important factor in the determination of corporate debt maturity policies. It has also frequently been argued that agency considerations favor shorter debt maturities. In this paper, we show that if the locus of the agency problem is the firm's ability to manipulate the timing of firm cash flows, short-term debt induces an agency problem by encouraging investment myopia. Despite this, short-term debt may be an optimal financing vehicle when the agency conflict is accompanied by asymmetry of information between the firm and outside investors. Further, long-term covenanted debt, which eliminates myopic bias in investment policies, may induce negative informational effects sufficiently powerful to preclude its use.

Item Type: Conference or Workshop Item (Paper)
Keywords: Finance; Investment myopia; Debt
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 07 Jun 2012 08:46
Last Modified: 23 Oct 2015 14:07

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