The Manager - Shareholder Agency Conflict: Do Banks Prefer Non-Alignment?

Abstract

This paper studies the link between the agency costs of equity and the agency costs of debt. Using a unique sample of the ownership structure of single and dual class firms as well as hand-collected data on loan contracts, we find that the agency cost of debt – proxied by various loan contracts terms - increases in the voting power of the largest outside shareholder, our primary measure of the agency cost of equity. We provide evidence that these results are consistent with debt holders being concerned about the high risk-shifting incentives of equity holders.

Keywords: blockholder, capx covenant, bank loan, risk-shifting

JEL Classification: G34, G32