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Measuring the Agency Cost of Debt
Author(s) -
MELLO ANTONIO S.,
PARSONS JOHN E.
Publication year - 1992
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1992.tb04687.x
Subject(s) - leverage (statistics) , agency cost , capital structure , debt , incentive , agency (philosophy) , enterprise value , economics , value (mathematics) , microeconomics , monetary economics , business , finance , corporate governance , philosophy , epistemology , machine learning , computer science , shareholder
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.