Firms plagued by the Myers underinvestment problem can mitigate the severity of underinvestment by selling their high credit-quality accounts receivable. This paper solves for the break-point level of receivable credit-quality (that is, the level of credit-quality such that the sale of receivables whose quality is greater than this level will mitigate the magnitude of underinvestment,) and demonstrates that this break-point is an increasing function of the riskiness of the firms' debt. The predictions of this model have broad implications for the nature of factoring and receivable securitization contracts.
|Original language||English (US)|
|Number of pages||11|
|Journal||Quarterly Review of Economics and Finance|
|State||Published - 1999|
All Science Journal Classification (ASJC) codes
- Economics and Econometrics
- Accounts receivable