RT Journal Article
T1 Secured Debt, Agency Problems, and the Classic Model of the Firm
A1 F. Navas, Javier
K1 Secured debt
K1 Underinvestment
K1 Overinvestment
K1 Merton (1974) model
AB In the traditional literature on firm models it is generally accepted that secured debt reduces the agency costs of debt, as it alleviates the underinvestment and overinvestment problems. We demonstrate that secured debt can also produce the opposite effects. Under the [Merton 1974, On the Pricing of Corporate Debt: The Risk Structure of Interest Rates, Journal of Finance 29, 442–470] framework, we provide numerical examples where junior secured debt produces underinvestment and senior and all-assets secured debt bring about overinvestment. Project financing and independent-firm financing eliminate these problems but may induce suboptimal decisions for shareholders. We show that shareholders will finance a project as an independent firm if its net present value is sufficiently high. Otherwise, they are better off financing the project with all-assets secured debt.
PB World Scientific
YR 2021
FD 2021-06-03
LK https://hdl.handle.net/10433/21663
UL https://hdl.handle.net/10433/21663
LA en
NO The Quarterly Journal of Finance, Vol. 11, No. 03, 2150015 (2021)
NO Departamento de Economía Financiera y Contabilidad
DS RIO
RD Apr 24, 2026