A situation which occurs when shareholders prompt a company to invest in assets that are riskier than what bondholders want (asset substitution). The newer, riskier investment potentially increases the return that shareholders will see from their stock, while increasing the risk that bondholders will bear due to the increased risk of bankruptcy.
Related information about asset substitution problem:
- Asset Substitution Problem Definition | Investopedia
A problem that arises when a company exchanges its low-risk assets for high-risk investments. This substitution transfers value from a firm's bondholders to its ...
- Asset Substitution Problem - Financial Dictionary - The Free Dictionary
Arises when the stockholders substitute riskier assets for the firm's existing assets and expropriate value from the debtholders.
- What is asset substitution problem? definition and meaning
Definition of asset substitution problem: A situation which occurs when shareholders prompt a company to invest in assets that are riskier than what bondholders ...
- Asset Substitution, Debt Overhang, and Optimal Capital Structure
Jensen and Meckling (1976) point out the asset substitution problem; .... find that the agency cost of the asset substitution problem is insignificant (1.5%), yet this ...
- Asset substitution problem Definition - NASDAQ.com
Asset substitution problem: read the definition of Asset substitution problem and 8000+ other financial and investing terms in the NASDAQ.com Financial ...
- On the Asset Substitution Problem - JStor
from the risk incentive problem (hereafter, the asset substitution problem) are, ... ated with the asset substitution problem and the leverage ratio have not been ...
- Accounting Transparency and the Asset Substitution Problem
exacerbate the well-known asset substitution problem of debt financing (e.g., ... concerned with the asset substitution problem when firms use transparent ...
- t - Duke University
We formulate the asset substitution problem in a continuous-time framework in ... This paper studies the asset substitution problem and the underinvestment ...