Determinants of Leverage and Agency Problems
53 Pages Posted: 16 Aug 1999
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: Suggested Citation