Keywords
agency costs of debt, securitization
Abstract
When a firm is facing default, equity holders have incentives to engage in asset substitution, underinvest, or directly transfer wealth. Few papers document investment distortions on account of debt-equity agency conflicts, only that the threat of distortions influence ex ante financing costs. A non-agency RMBS deal represents an entity that is highly leveraged where, ex ante, equity holders know they will face default. This provides an ideal laboratory for testing whether the threat of default creates any of the distortions predicted in theory. We estimate agency costs associated with direct wealth transfers to range between $.011 and $.025 per dollar.
Original Publication Citation
“A Direct Test of Agency Theories of Debt: Evidence from RMBS.” Management Science, 2017, Volume 65, Pages 1792-1809. (Co-author: Yilin Huang)
BYU ScholarsArchive Citation
Huang, Yilin and Nadauld, Taylor D., "A Direct Test of Agency Theories of Debt" (2014). Faculty Publications. 9253.
https://scholarsarchive.byu.edu/facpub/9253
Document Type
Peer-Reviewed Article
Publication Date
2014
Publisher
Management Science
Language
English
College
Marriott School of Business
Department
Finance
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