Effects Of The Agency Cost Of Debt And Managerial Risk Aversion On Capital Structure
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| Author | : Yilei Zhang |
| Publisher | : |
| Total Pages | : 40 |
| Release | : 2013 |
| Genre | : |
| ISBN | : |
This paper investigates the influence of managerial incentives on the capital structure decision using a sample of all-equity firms. Managerial risk-taking incentives may encourage financial risk taking hence greater leverage. On the other hand, increasing a manager's incentive to take risk increases the agency cost of debt and therefore lowers debt capacity. I provide evidence supporting the second effect in all-equity firms where the potential asset substitution is more severe. I show that CEO's pay-for-performance sensitivity (delta) and the sensitivity of CEO wealth to stock volatility (vega) are higher in all-equity firms than those in matched levered firms. In addition, the incentive compensation in all-equity firms encourages greater risk-taking activities than levered firms, suggesting a negative relation between leverage and risk taking incentives. I also find that the likelihood of having an all-equity capital structure increases in the risk taking incentives from managerial equity-based compensation. This remains after controlling for endogeneity, which may arise if overcoming managerial risk aversion is particularly important for these all-equity firms. Finally, I find that equity-based compensation and incentives decrease upon firms' switching to levered firms from all-equity firms, indicating the change of compensation structure is associated with the change of capital structure.
| Author | : Paul D. Childs |
| Publisher | : |
| Total Pages | : 52 |
| Release | : 2008 |
| Genre | : |
| ISBN | : |
In a dynamic continuous-time model, we examine the impact of a manager-shareholder conflict over the choice of investment risk on firm value and optimal capital structure. The manager's optimal investment risk policy is substantially different from the policy that maximizes equity or total firm value. The resulting agency costs of equity are many times larger than the agency costs of debt. Among a number of important implications, we find that managerial risk-aversion decreases the agency costs of equity. We also find that when equityholders have control rights over financing decisions, optimal leverage may increase relative to optimal leverage when investment risk is chosen to maximize total firm value. Additionally, greater managerial equity compensation may exacerbate the manager-stockholder conflict over investment policy, and in spite of higher agency costs of equity, may increase optimal leverage. Finally, we find that an increase in risk encourages the manager to pursue a more conservative investment strategy, which increases the agency costs of equity. Managerial risk-aversion, however, acts to mitigate this effect of risk on the agency costs of equity.
| Author | : Michael McDonald |
| Publisher | : |
| Total Pages | : |
| Release | : 2017 |
| Genre | : |
| ISBN | : |
We examine the impact of two defining social characteristics (individualism and risk aversion) and their interaction with governance and firm agency problems on capital structure in the G20 countries. With a sample of roughly 13,000 firms from 1995 to 2009, we show that higher levels of individualism are associated with increased firm use of debt and lower cost of capital, whereas higher risk aversion has the opposite effects. All else equal, better firm-level governance substantially reduces these cultural effects, as does larger firm size, and less research-intensity at the firm. To address endogeneity concerns, we use a propensity score matching procedure and show that our results continue to hold. Our results are also robust to alternative measures of culture, firm-level governance and agency costs, debt cost of capital, bankruptcy risk, identification concerns, and other country level effects.
| Author | : Joseph C. Kang |
| Publisher | : |
| Total Pages | : 56 |
| Release | : 1992 |
| Genre | : Capital |
| ISBN | : |
| Author | : Campbell R. Harvey |
| Publisher | : |
| Total Pages | : 32 |
| Release | : 2001 |
| Genre | : Capital |
| ISBN | : |
We provide new evidence that debt creates shareholder value for firms that face agency costs. Our tests are unique in two respects. First, we focus on a sample of firms with potentially extreme agency problems. We study emerging market firms where the routine use of pyramid ownership structures provides an acute separation of management cash flow rights and control rights. Second, we argue that not all debt is the same. Using new data on global debt issuance, we find that the type of debt that positively impacts shareholder value is the type that closely monitors management. This combination of a sample of firms with extreme expected agency problems and detailed information on the different types of debt allows us to construct powerful tests of whether debt can mitigate the effects of agency and information problems. Among other results, we find that the abnormal returns resulting from syndicated term loans (which provide monitoring) are significantly related to the extent of the separation of ownership and control. Our results are consistent with the idea that debt creates value because it reduces the agency costs associated with overinvestment
| Author | : Fabrizio Barca |
| Publisher | : OUP Oxford |
| Total Pages | : 354 |
| Release | : 2001-11-15 |
| Genre | : Business & Economics |
| ISBN | : 0191530050 |
Written by an international team of authors, this book provides the first systematic account of the control of corporate Europe based on voting block data disclosed in accordance with the European Union's Large Holdings Directive (88/627/EEC). The study provides detailed information on the voting control of companies listed on the official markets in Austria, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, the United Kingdom, and, as a benchmark comparison, the United States. The authors record a high concentration of control of corporations in many European countries with single blockholders frequently controlling more than fifty per cent of corporate votes. In contrast, a majority of UK listed companies have no blockholder owning more than ten per cent of shares, and a majority of US listed companies have no blockholder with more than six per cent of shares. Those chapters devoted to individual countries illustrate how blockholders can use legal devices to leverage their voting power over their cash-flow rights, or how incumbents prevent outsiders from gaining voting control. It is shown that the cultural and linguistic diversity of Europe is (almost) matched by its variety of corporate control arrangements.
| Author | : Christian Funke |
| Publisher | : GRIN Verlag |
| Total Pages | : 109 |
| Release | : 2007-07 |
| Genre | : Business & Economics |
| ISBN | : 3638702251 |
Diploma Thesis from the year 2003 in the subject Business economics - Investment and Finance, grade: 1,1 (A), European Business School - International University Schlo Reichartshausen Oestrich-Winkel (Endowed-Chairf for Corporate Finance and Capital Markets), language: English, abstract: The idea that the general characteristics of a firm's ownership structure can affect performance has achieved considerable attention and related research brought forward relatively consistent empirical evidence e.g. on the positive impact of managerial ownership on firm performance. However, the evidence on the relation between ownership and capital structure is less consistent and numerous, although there are good reasons to believe that there may be such a relationship. Since the capital structure irrelevance propositions of MODIGLIANI/MILLER economists have devoted considerable time to studying cross-sectional and time-series variations in capital structure. More recent work following the seminal contribution by JENSEN/MECKLING has employed an agency theory perspective in the search for an explanation of capital structure variations. With this managerial perspective capital structure is not only explained by variations in internal and external contextual factors of the firm, but also by the values, goals, preferences and desires of managers. Corporate financing decisions are influenced by managers' incentives and the incentives for managers to act opportunistically can be influenced by the ownership structure of the firm. However, most empirical work analyzing a firm's capital structure in cross-sectional and time-series studies ignores the equity ownership structure as a possible explanatory variable. This can be partly explained by problems associated with the availability of ownership data, when compared to readily available accounting and market data on other relevant variables. Notwithstanding, it entails a problem of model misspecification as omitting a relevant variable
| Author | : Karl V. Lins |
| Publisher | : |
| Total Pages | : 40 |
| Release | : 2003 |
| Genre | : |
| ISBN | : |
This paper conducts powerful new tests of whether debt can mitigate the effects of agency and information problems. We focus on emerging market firms for which pyramid ownership structures create potentially extreme managerial agency costs. Our tests incorporate both traditional financial statement data and new data on global debt contracts. Our analysis is mindful of the potential endogeneity between debt, ownership structure, and value, and takes into account differences in the debt capacity of a firm's assets in place and future growth opportunities. The results indicate that the incremental benefit of debt is concentrated in firms with high expected managerial agency costs that are also most likely to have overinvestment problems resulting from high levels of assets in place or limited future growth opportunities. Subsequent internationally syndicated term loans are particularly effective at creating value for these firms. Our results support the recontracting hypothesis that equity holders value compliance with monitored covenants, particularly when firms are likely to overinvest.
| Author | : Campbell R. Harvey |
| Publisher | : |
| Total Pages | : 45 |
| Release | : 2010 |
| Genre | : |
| ISBN | : |
We provide new evidence that debt creates shareholder value for firms that face agency costs. Our tests are unique in two respects. First, we focus on a sample of firms with potentially extreme agency problems. We study emerging market firms where the routine use of pyramid ownership structures provides an acute separation of management cash flow rights and control rights. Second, we argue that not all debt is the same. Using new data on global debt issuance, we find that the type of debt that positively impacts shareholder value is the type that closely monitors management. This combination of a sample of firms with extreme expected agency problems and detailed information on the different types of debt allows us to construct powerful tests of whether debt can mitigate the effects of agency and information problems. Among other results, we find that the abnormal returns resulting from syndicated term loans (which provide monitoring) are significantly related to the extent of the separation of ownership and control. Our results are consistent with the idea that debt creates value because it reduces the agency costs associated with overinvestment.
| Author | : Frank J. Fabozzi |
| Publisher | : |
| Total Pages | : |
| Release | : 2008-10-06 |
| Genre | : Business & Economics |
| ISBN | : 9780470404324 |
"The Handbook of Finance is a comprehensive 3-Volume Set that covers both established and cutting-edge theories and developments in finance and investing. Edited by Frank Fabozzi, this set includes valuable insights from global financial experts as well as academics with extensive experience in this field. Organized by topic, this comprehensive resource contains complete coverage of essential issues—from portfolio construction and risk management to fixed income securities and foreign exchange—and provides readers with a balanced understanding of today’s dynamic world of finance. A brief look at each volume: Volume I: Financial Markets and Instruments skillfully covers the general characteristics of different asset classes, derivative instruments, the markets in which financial instruments trade, and the players in those markets. Volume II: Investment Management and Financial Management focuses on the theories, decisions, and implementations aspects associated with both financial management and investment management. Volume III Valuation, Financial Modeling, and Quantitative Tools contains the most comprehensive coverage of the analytical tools, risk measurement methods, and valuation techniques currently used in the field of finance."
