Determinants of Leverage and Agency Problems

53 Pages Posted: 16 Aug 1999

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University; Monash University

Ronald van Dijk

APG Asset Management

Date Written: July 30, 1999


In this paper we empirically investigate the determinants of leverage and specific agency problems and we examine the relations between leverage and these agency problems. We use structural-equations modeling with latent variables and questionnaire data. The questions concern the characteristics of the respondents' firms, including the presence of four agency problems, i.e. direct wealth transfer, asset substitution, underinvestment, and overinvestment. We estimate the relations between these characteristics. The results for a sample of Dutch listed firms confirm that the trade-off between tax advantages and bankruptcy costs determines leverage. We also find free cash flow and corporate-governance characteristics as determinants of overinvestment. Despite findings that agency problems are present, we find no evidence of direct relations between leverage and the four agency problems. A robustness analysis shows that these findings are driven by the Dutch institutional setting.

JEL Classification: G32

Suggested Citation

de Jong, Abe and van Dijk, Ronald, Determinants of Leverage and Agency Problems (July 30, 1999). Available at SSRN: or

Abe De Jong (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
+31 10 408 1022 (Phone)

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Monash University ( email )

900 Dandenong Rd
Room H3-56
Caulfield East, Victoria 3145

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Ronald Van Dijk

APG Asset Management

Gustav Mahlerplein 3
Amsterdam, 1082 MS

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