Selling accounts receivable and the underinvestment problem

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18 Scopus citations

Abstract

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 languageEnglish (US)
Pages (from-to)291-301
Number of pages11
JournalQuarterly Review of Economics and Finance
Volume39
Issue number2
DOIs
StatePublished - 1999

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Accounts receivable
  • Factoring
  • Underinvestment

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