Asset Substitution Problem

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Asset substitution problem

Arises when the stockholders substitute riskier assets for the firm's existing assets and expropriate value from the debtholders.

Asset Substitution

A company's exchange of lower-risk investments for higher-risk investments. Firms may use asset substitution as a form of financing, or as a move to please shareholders. It can be detrimental to the company's bondholders as it increases the possibility of default without any corresponding benefit because bonds have a fixed interest rate. On the other hand, asset substitution can benefit shareholders as it carries the possibility of higher returns.

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Underinvestment Problem			Zhang (2007) indicates that this argument is true for firms with severe asset substitution problems, particularly all equity firms with high growth potential. Are debt and incentive compensation substitutes in controlling the ... by Zhang, Yilei / Financial Management Our results also suggest that firms do not solve the asset substitution problem by issuing common equity because they appear to have relatively high adverse selection problems. Is Convertible Debt a Substitute for Straight Debt or for Common ... by Lewis, Craig M.; Rogalski, Richard J.; Seward, James K. / Financial Management According to Bicksler and Chen (1991), this impact should be expected, as these covenants help align bondholder and stockholder interests and thus mitigate the asset substitution problem that might exist in the absence of these provisions. Event risk bond covenants, agency costs of debt and equity, and ... by Bae, Sung C.; Klein, Daniel P.; Padmaraj, Raj / Financial Management			Asset Conservation, Lender Liability and Deposit Insurance Act of 1996 asset cost recovery system Asset Coverage Asset Coverage Ratio asset depreciation range Asset Depreciation Range System Asset Depreciation Risk Asset Financing Asset for Asset Swap Asset Impairment Asset Ledger asset management Asset Management Account Asset Motive Asset Play Asset Price Asset Pricing Model Asset Quality asset redeployment Asset Retirement Obligation Asset Sale Asset Share Value Asset Stripper Asset Stripping Asset Substitution Asset Substitution Problem Asset Sufficiency or Insufficiency Asset Swap Asset Turnover Asset Valuation Asset Valuation Reserve Asset Value Asset-Backed Alert Asset-Backed Bond Asset-Backed Commercial Paper Asset-Backed Fund Asset-Backed Security Asset-Based Finance Asset-Based Financing Asset-Conversion Loan Asset-Coverage Test Asset-Liability Committee Asset-Liability Gap Asset/Equity Ratio Asset/Liability Committee Asset/Liability Management Assets Assets and Valuation Assets Requirement Assets requirements Assets Under Management			Asset Recovery Program Asset Recovery Service Provider Asset Redeployment Asset Redeployment Management System Asset Redeployment Team Asset Reliability Technology Asset Reporting Code Asset Requirement Asset retirement obligation Asset retirement obligation Asset Retirement Obligations Asset Rich, Income Poor Asset Sale Asset Sales Asset securitization Asset securitization Asset Sensitive Asset Servicing Technology Enhancement Project Asset Share Value Asset Share Values Asset Source for Software Engineering Technology Asset Source for Software Engineering Technology Asset Status Card Asset stripper Asset Strippers Asset stripping Asset stripping Asset stripping Asset substitution Asset Substitution Problem Asset Sufficiency Asset Sufficiency or Insufficiency Asset swap Asset swap Asset Swap Convertible Option Trade Asset Swaps Asset TEMP Asset Test Asset Tests Asset Tracking and Accountability Control System Asset Tracking and Logistics Automated Support System Asset Tracking Logistics and Supply System Asset Transfer Asset Transfer Asset Transfer Asset Transfer Asset Transfer Asset Transfer Date Asset Transfers Asset Transfers Asset Transfers Asset Transfers Asset Transfers Asset turnover Asset turnover Asset Turnover Ratio Asset Turnover Ratios Asset Turnovers Asset Under Administration Asset Under Construction

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