Ownership Concentration, Monitoring, and the Agency Cost of Debt

Abstract:     
If shareholders are prone to excessive risk-taking, delegating the project choice to a manager with conflicting interests may reduce the agency cost of debt. The extent to which this delegation is credible, however, depends on the shareholders' ability to commit not to overrule the manager's decision ex post. Based on this problem, this paper shows that firms with dispersed share ownership face comparatively lower agency cost of debt than firms with concentrated share ownership. The paper also establishes a link between firm growth and ownership structure, implying that firms with concentrated ownership may voluntarily forego profitable investment opportunities even if there is no credit rationing.

JEL Classifications: G32

Working Paper Series