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Keywords: underinvestment
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Journal Articles
Journal of Law, Finance and Accounting (2025) 8 (2): 143–163.
Published: 17 February 2025
... is negatively related to leverage in frictionless markets (the so-called underinvestment problem). If the firm plans to underinvest because of debt overhang, shareholders and debt holders will costlessly re-contract around the debt overhang until the firm takes on the optimal investment. However, if we were...

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