We model the joint dynamics of corporate investment, borrowing, payout and managerial rents in a mature public corporation. Managers act in their self-interest subject to a governance constraint. There are no financial imperfections except for corporate taxes. Managers underinvest because of risk aversion. They use debt as a shock absorber. Changes in debt are persistent, but managers gradually pay down debt as a way of precautionary saving. Managers do not exploit interest tax shields, even though tax shields add value for investors. We compare our model with conventional agency models and dynamic tradeof models based on financing frictions.

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