Measuring Agency Costs over the Business Cycle, Management Science, 2018, 64(12), 5848-5768.

Abstract: This paper investigates the joint effects of manager–shareholder agency conflicts and macroeconomic risk on corporate policies and firm value. I first derive the implications of a structural model of a firm with assets in place and an investment opportunity, run by a self-interested manager who captures part of the firm’s net income as private benefits. The model implies that dynamic aggregate agency costs are driven by firms in the upper half of the distribution of private benefits. Managers of those firms capture 0.8% of firms’ net income on average, thereby decreasing aggregate firm value by 1.7%. These agency costs are procyclical (1.9% in booms and 1.4% in recessions) because managerial underleverage decreases default costs particularly in recessions. Furthermore, the model can explain empirical regularities, including the joint level and cyclicality of leverage.

Growth Options, Macroeconomic Conditions, and the Cross Section of Credit Risk, with M. Arnold and A.F. Wagner (2013). Journal of Financial Economics 107 (2), 350-385.

Abstract: This paper develops a structural equilibrium model with intertemporal macroeconomic risk, incorporating the fact that firms are heterogeneous in their asset composition. Compared with firms that are mainly composed of invested assets, firms with growth options have higher costs of debt because they are more volatile and have a greater tendency to default during recession when marginal utility is high and recovery rates are low. Our model matches empirical facts regarding credit spreads, default probabilities, leverage ratios, equity premiums, and investment clustering. Importantly, it also makes predictions about the cross section of all these features.

Working Papers

Debt Renegotiations outside Distress, with M. Arnold. R&R at Review of Finance.

Abstract: This paper develops a model to explore the implications of non-distressed debt renegotiation on debt prices and corporate policies. The model incorporates the empirical observation that creditors can influence firms also outside corporate distress through debt covenant renegotiation and not only in distress. We find that considering both distressed and non-distressed creditor interventions is key to investigating how creditor governance affects firms. The model explains cross-sectional patterns of control premiums and credit spreads that traditional debt renegotiation models do not capture. We also derive novel implications for the impact of firm characteristics associated with renegotiation on debt prices and corporate policies.

Personal Taxes and Corporate Cash Holdings, with J. Dick-Nielsen und K.R. Miltersen

Abstract: Dividends are taxed at the personal level, but injecting funds into firms does not offer the symmetric tax benefit. Hence, there is a tax saving incentive to retain cash in the firm. We develop a corporate finance model of liquidity management, in which the firm’s liquidity policy trades off precaution and saved personal taxes against agency and corporate tax costs. The model implies that the tax saving motive is substantial and increasing with the dividend tax rate. Consistent with the model, we empirically show that affected firms reduce their cash accumulation after a dividend tax cut.