File Download

There are no files associated with this item.

  Links for fulltext
     (May Require Subscription)
Supplementary

Article: Capacity Decisions with Debt Financing: The Effects of Agency problem

TitleCapacity Decisions with Debt Financing: The Effects of Agency problem
Authors
KeywordsDecision analysis
Capacity decision
Debt financing
Conflicts of interest
Agency cost
Issue Date2017
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ejor
Citation
European Journal of Operational Research, 2017, v. 261 n. 3, p. 1158-1169 How to Cite?
AbstractThis paper studies the capacity management problem for a firm that uses debt financing. This is done by analyzing the effect of the associated agency problem when making capacity decisions. The agency problem arises when there are potential conflicts of interest between the firm owner and the lender. We show that this agency problem can constrain the firm's optimal capacity decision, because the borrowing rate will increase as the risk of default increases with capacity level chosen. The firm will therefore try to optimally choose the level so as to reduce the risk of bankruptcy, which the lender will take into account, and as a consequence the firm will try to control the risk associated with potentially high borrowing costs. However, even when the expected bankruptcy cost is carefully controlled, the optimal capacity decision is still made at the risk of incurring considerable agency costs. In addition, the corporate tax level can also play a significant role in capacity choice. We show that although a higher tax rate leads to bigger tax benefit of debt and lower agency cost, it also gives rise to a higher tax liability. After balancing the tax benefit of debt with the agency cost, the firm can make an optimal decision on the capacity level required. The efficacy of financial hedging for mitigating the agency cost is also analyzed. Finally, we compare and contrast our analysis with existing studies, and it appears that we have been able to obtain a deeper insight into the problem.
Persistent Identifierhttp://hdl.handle.net/10722/239554
ISSN
2017 Impact Factor: 3.428
2015 SCImago Journal Rankings: 2.595
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorNi, J-
dc.contributor.authorChu, LK-
dc.contributor.authorLi, Q-
dc.date.accessioned2017-03-21T09:15:45Z-
dc.date.available2017-03-21T09:15:45Z-
dc.date.issued2017-
dc.identifier.citationEuropean Journal of Operational Research, 2017, v. 261 n. 3, p. 1158-1169-
dc.identifier.issn0377-2217-
dc.identifier.urihttp://hdl.handle.net/10722/239554-
dc.description.abstractThis paper studies the capacity management problem for a firm that uses debt financing. This is done by analyzing the effect of the associated agency problem when making capacity decisions. The agency problem arises when there are potential conflicts of interest between the firm owner and the lender. We show that this agency problem can constrain the firm's optimal capacity decision, because the borrowing rate will increase as the risk of default increases with capacity level chosen. The firm will therefore try to optimally choose the level so as to reduce the risk of bankruptcy, which the lender will take into account, and as a consequence the firm will try to control the risk associated with potentially high borrowing costs. However, even when the expected bankruptcy cost is carefully controlled, the optimal capacity decision is still made at the risk of incurring considerable agency costs. In addition, the corporate tax level can also play a significant role in capacity choice. We show that although a higher tax rate leads to bigger tax benefit of debt and lower agency cost, it also gives rise to a higher tax liability. After balancing the tax benefit of debt with the agency cost, the firm can make an optimal decision on the capacity level required. The efficacy of financial hedging for mitigating the agency cost is also analyzed. Finally, we compare and contrast our analysis with existing studies, and it appears that we have been able to obtain a deeper insight into the problem.-
dc.languageeng-
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ejor-
dc.relation.ispartofEuropean Journal of Operational Research-
dc.subjectDecision analysis-
dc.subjectCapacity decision-
dc.subjectDebt financing-
dc.subjectConflicts of interest-
dc.subjectAgency cost-
dc.titleCapacity Decisions with Debt Financing: The Effects of Agency problem-
dc.typeArticle-
dc.identifier.emailChu, LK: lkchu@hkucc.hku.hk-
dc.identifier.authorityChu, LK=rp00113-
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1016/j.ejor.2017.02.042-
dc.identifier.scopuseid_2-s2.0-85016046733-
dc.identifier.hkuros271659-
dc.identifier.volume261-
dc.identifier.issue3-
dc.identifier.spage1158-
dc.identifier.epage1169-
dc.identifier.isiWOS:000401889300026-
dc.publisher.placeNetherlands-

Export via OAI-PMH Interface in XML Formats


OR


Export to Other Non-XML Formats