Investing the Alaskan Project Cash Flows: The Sohio Experience

Cooper, Kerry; Richards, R. Malcolm

doi:10.2307/3665526

Cited by 4 publications

(1 citation statement)

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“…The investment opportunity set described above is meant to capture Jensen's (1986) idea that the overinvestment problem is most acute in firms that possess some highly profitable projects, the proceeds of which can be squandered in wasteful expansion (see Cooper and Richards (1988) for a graphic illustration of these problems in the case of Sohio Oil company). We make the further assumption that

I_{1} prefix(Z_{H} - 1 postfix) + I_{2} = I_{1} Z_{normalL} + prefix(I_{2} - I_{1} postfix) Y_{normalH}

, which guarantees that expected returns from investment are the same in both states, if the manager chooses

I_{1}

in state one and

I_{2}

in state two.…”

Section: Solutions To the Free Cash Flow Problem When The Manager mentioning

confidence: 99%

Marketable Incentive Contracts and Capital Structure Relevance

Garvey¹

1997

The Journal of Finance

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This article investigates the claim that debt finance can increase firm value by curtailing managers' access to “free cash flow.” We first show that incentive contracts that tie the managers' pay to stockholder wealth are often a superior solution to the free cash flow problem. We then consider the possibility that the manager can trade on secondary capital markets. Liquid secondary markets are shown to undermine management incentive schemes and, in many cases, to restore the value of debt finance in controlling the free cash flow problem.

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