Corporate Governance and Capital Structure Dynamics
Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
University of Rochester - Simon Graduate School of Business
University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)
September 1, 2008
AFA 2009 San Francisco Meetings Paper
We develop a dynamic tradeoff model to examine the importance of manager-shareholder conflicts in capital structure choice. Using panel data on leverage choices and the model's predictions for different statistical moments of leverage, we show that while refinancing costs help explain the patterns observed in the data, their quantitative effects on debt choices are too small to explain financing decisions. We also show that by adding agency conflicts in the model and giving the manager control over the leverage decision, one can obtain capital structure dynamics consistent with the data. In particular, we find that the model needs an average agency cost of 1.5% of equity value to resolve the low-leverage puzzle and to explain the time series of observed leverage ratios. Our estimates also reveal that the variation in agency costs across firms is sizeable and that the levels of agency conflicts inferred from the data correlate with commonly used proxies for corporate governance.
Number of Pages in PDF File: 58
Keywords: dynamic capital structure, private benefits of control, structural estimation
JEL Classification: G12, G31, G32, G34
Date posted: March 27, 2008 ; Last revised: December 25, 2010
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