Underinvestment problem

Definition:

The mirror image of the asset substitution problem, in that stockholders refuse to invest in low-risk assets to avoid shifting wealth from themselves to debtholders.

Investing Essentials


Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University

Term of the Day

Mortgage bond

A bond in which the issuer has granted the bondholders a lien against the pledged assets. See: Collateral trust bonds

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