This is the underinvestment problem
identified by Myers (1977, p.
This means that part of the benefit of investing goes to the creditors, which is what creates the debt-overhang underinvestment problem
Finally, the underinvestment hypothesis, developed by Bodie and Taggart (1978) and Barnea, Haugena, and Senbet (1980), demonstrates that the Myers' (1977) underinvestment problem
can be resolved with a call provision.
Any future replacement for the ITS would likely experience the same underinvestment problem
Some of the contractual solutions to the underinvestment problem
rely on complex direct-revelation mechanisms that utilize private or unverifiable information to implement efficient investments as in, for example, Rogerson (1992) and Maskin and Tirole (1999), but they are not robust to renegotiation.
But, more importantly, implementing a policy that rewards the diffusion of technology can create new incentives for additional spending on research and development, thereby potentially solving the underinvestment problem
resulting from market failure.
The agency costs of the underinvestment problem
are particularly high for firms having both high leverage and growth opportunities.
High-growth opportunity firms are more likely to face an underinvestment problem
compared with low-growth opportunity firms and, thus, the negative effect of longer debt maturity on investment should be stronger for high-growth opportunity firms.
In both cases an underinvestment problem
results if the marginal agency cost is positive.
Hadlock (1998) provides a model in which increasing managements' share of shareholder wealth changes exacerbates the Myers/Majluf underinvestment problem
Two common examples are the asset substitution problem and the underinvestment problem
introduced by Jensen and Meckling (1976) and Myers (1977).
At the same time, Stulz and Johnson (1985) have shown that high-priority claims, such as leasing, can help mitigate the underinvestment problem
relative to other forms of debt.