Corporate Finance Theory
Session Chair: Lyndon Moore, Monash University
Optimal Time-Consistent Debt Policies
Anton Tsoy; University of Toronto
Andrey Malenko; Boston College
We study a trade-off model where shareholders can freely adjust leverage but lack commitment to debt policies. A policy is time-consistent if shareholders prefer it to deviating and losing credibility ex-post. The optimal time-consistent debt policy includes a stable regime, where shareholders actively manage liabilities to stay at the target leverage, and a distress regime triggered by large negative shocks, where shareholders temporarily abandon the target. This policy has several realistic features and bridges the static trade-off theory and the leverage ratchet effect, which so far have very different predictions about leverage dynamics.
Discussant: David Frankel, Melbourne Business School, The University of Melbourne
Pollution Abatement Investment under Financial Frictions and Policy Uncertainty
Min Fang; University of Florida
Po-Hsuan Hsu; National Tsing Hua University
Chi-Yang (Ben) Tsou; Alliance Manchester Business School, University of Manchester
This paper examines how financial frictions and policy uncertainty jointly influence firms’ investments in pollution abatement. Our data analyses suggest that financially constrained firms are less likely to invest in pollution abatement and are more likely to release toxic pollutants, with this pattern intensified by policy uncertainty surrounding future environmental regulations, as measured by “close” gubernatorial elections or uncertainty revealed in firms’ earnings conference calls. We then develop a general equilibrium model with heterogeneous
firms, including both financially constrained and unconstrained firms, in which financially constrained firms face increased marginal costs of finance from pollution abatement. These costs are further amplified by policy uncertainty, reducing firms’ incentives to prevent pollution. Therefore, the aggregate effect of environmental policies depends on the distribution of financial frictions and policy uncertainty.
Discussant: Neal Galpin, Monash University