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The Underinvestment Problem, Bond Covenants, and Insurance [PDF]

The Journal of Risk and Insurance, 1993
Introduction The underinvestment problem has been well known in finance since the appearance of Myers's (1977) seminal work on "The Determinants of Corporate Borrowing." Myers considers a situation in which the firm has an outstanding bond issue now and may invest in a positive net present value project then.(1) The payoff on the investment project is ...
James R. GARVEN, Richard D. MACMINN
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Societal trust and corporate underinvestment

Global Finance Journal, 2022
Andreas Knetsch, Astrid Salzmann
exaly   +2 more sources

Underinvestment or/and Overinvestment?

2012
In Chapter 4 we highlighted the potential for market failure in allocating fixed capital, one reason being the difficulty of investment decision-making under uncertainty. That argument in itself may not be enough to convince doubters of the case for a negative bias to capital investment. It may for example reasonably be claimed that the ‘animal spirits’
Ciaran Driver, Paul Temple
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Underinvestment in Public Good Technologies

Journal of Technology Transfer, 2004
Although underinvestment phenomena are the rationale for government subsidization of research and development (R&D), the concept is poorly defined and its impact is seldom quantified. Conceptually, underinvestment in industrial R&D can take the form of either a wrong amount or a suboptimal composition of R&D investment.
Gregory Tassey, Tassey Gregory
exaly   +2 more sources

OPERATING LEVERAGE AND UNDERINVESTMENT

Journal of Financial Research, 2019
AbstractUsing a contingent claims model, we examine the impacts of both operating leverage and financial leverage on a firm's investment decisions in the context of capacity expansion. Our model shows that quasi‐fixed operating costs could significantly mitigate the underinvestment problem for debt‐financed firms.
Feng Jiao, Michi Nishihara, Chuanqian Zhang   +2 more
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Competition for Procurement Contracts and Underinvestment

International Economic Review, 1990
A two-period model is considered in which ex ante identical firms invest in period one, and in period two, after they learn their costs, the lowest cost firm is chosen as the winner of the contract. It is found that even though firms are racing against one another, they end up underinvesting relative to the ex ante socially optimal levels when the ...
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How underinvestment reduces underpricing

International Journal of Finance and Economics
AbstractWe develop an economic model demonstrating that firms can benefit from committing to underinvestment. The model considers a firm's IPO, secondary‐market trading and subsequent investment decision. We analyse the conditions under which underinvestment can paradoxically be advantageous despite reducing the fundamental value of the firm.
Marco Bade
exaly   +2 more sources

Corporate Insurance and the Underinvestment Problem

The Journal of Risk and Insurance, 1987
A casualty loss produces option-like characteristics in assets because their value depends on further discretionary investment. With risky debt in the firm's capital structure, the shareholders can have incentives to forgo the discretionary investment, even though it has a positive net present value.
David Mayers, Clifford W. Smith
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Sovereign Debt: Optimal Contract, Underinvestment, and Forgiveness

The Journal of Finance, 1992
ABSTRACTIn this paper we develop a time consistent rational expectations model which analyzes the equilibrium loan contract between a borrowing country and a foreign bank. The loan contract specifies both the amount of the loan and the promised interest payments, and rationally reflects the investment decisions of the country and the possibilities of ...
Schwartz, Eduardo S, Zurita, Salvador
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THE POLITICS OF UNDERINVESTMENT IN AGRICULTURAL RESEARCH

1996
This paper develops a political economy framework that determines the factors causing underinvestment in public research expenditures. Governments are unable to fully compensate for unequal income distribution effects of research because of either their inability to make credible commitments or of deadweight costs associated with compensation.
De Gorter, Harry, Swinnen, Johan F.M., De Gorter, Harry, Swinnen, Johan F.M.   +3 more
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