Corporate Governance and Capital Structure Dynamics

58 Pages Posted: 27 Mar 2008 Last revised: 25 Dec 2010

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Boris Nikolov

University of Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Norman Schürhoff

University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2008

Abstract

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.

Keywords: dynamic capital structure, private benefits of control, structural estimation

JEL Classification: G12, G31, G32, G34

Suggested Citation

Morellec, Erwan and Nikolov, Boris and Schürhoff, Norman, Corporate Governance and Capital Structure Dynamics (September 1, 2008). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1106164 or http://dx.doi.org/10.2139/ssrn.1106164

Erwan Morellec (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Boris Nikolov

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

University of Lausanne ( email )

Lausanne, CH-1015
Switzerland

Norman Schürhoff

University of Lausanne ( email )

Extranef 228
CH-1015 Lausanne
Switzerland
+41 (0)21 692 3447 (Phone)
+41 (0)21 692 3435 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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