Ownership Concentration, Monitoring, and the Agency Cost of Debt

22 Pages Posted: 16 Dec 1999

See all articles by Holger M. Mueller

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Roman Inderst

Goethe University Frankfurt

Date Written: September 1999

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 Classification: G32

Suggested Citation

Mueller, Holger M. and Inderst, Roman, Ownership Concentration, Monitoring, and the Agency Cost of Debt (September 1999). Available at SSRN: https://ssrn.com/abstract=190497 or http://dx.doi.org/10.2139/ssrn.190497

Holger M. Mueller (Contact Author)

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Roman Inderst

Goethe University Frankfurt ( email )

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HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

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