Download or read book Solving the Multi-Period Agency Problem and Design of Corporate Securities written by Ren-Raw Chen and published by . This book was released on 2010 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper identifies and solves the multi-period agency problem. Overcoming the major weakness of traditional agency theory in a one period world, we adopt a multi-period option method to show adverse incentive problems with debt solving for the actual agency cost using compound options. It does not require asymmetric information as exists with current agency models. We find that firms can have debts greater than their asset value and continue to operate as long as current payments are being met. This situation creates an incentive for them to sell off their best assets that increases the risk of their remaining business and reduces survival. A major result of this model is to show why sinking funds actually increase a firm's agency costs explaining the demise of the traditional sinking fund over the last twenty years.