Shareholder-Manager Alignment and the Cost of Debt
Matthew T. Billett
Indiana University - Kelley School of Business - Department of Finance
University of Iowa - Henry B. Tippie College of Business
University of New Hampshire
We investigate the influence of shareholder-manager incentive alignment on the cost of debt using a sample of dual-class firms, where managerial voting rights and cash-flow rights can be separated. We find the cost of debt financing increases in managerial voting rights and decreases in cash-flow rights. However, we also find that the amount of leverage increases in managerial voting rights and decreases in cash-flow rights. Together the results suggest that although the cost of debt increases when shareholder and manager interests diverge, the cost of debt relative to the cost of equity declines, making debt more appealing to firms with high potential agency costs of equity.
Number of Pages in PDF File: 36
Keywords: dual-class, cost of debt, agency costs, managerial ownership, shareholder-manager alignment
JEL Classification: G32, G34
Date posted: January 23, 2007 ; Last revised: June 2, 2015
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