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Asset substitution |
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Asset substitution 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. How to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit webmaster's page for free fun content. |
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The mirror image of the asset substitution problem, in that stockholders refuse to invest in low-risk assets to avoid shifting wealth from themselves to debtholders. Second, asset substitution in particular can produce "overinvestment," which occurs when a debtor's ability to shift downside risk onto creditors induces the debtor to invest in risky projects whose expected social value is negative. Within low-growth absolute-control firms, because of possible conflict of interest between the major shareholder and creditors, there is a possible asset substitution effect. |
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