The Agency Credit Spread

72 Pages Posted: 1 Jan 2014 Last revised: 16 Feb 2018

See all articles by Andrea Gamba

Andrea Gamba

University of Warwick - Finance Group

Mamen Aranda

University of Navarra - Business

Alessio Saretto

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: February 10, 2018


Lack of shareholders' commitment about debt and investment policies, although mitigated by debt covenants, maturity, and other contractual provisions, contributes a significant part of the firm's cost of debt, which we refer to as the agency credit spread (ACS). We propose a dynamic model of investment and financing, in which we characterize the debt protection against agency distortions as a reduced form specification of the value function. The model features long-term debt and allows for several possible distortions of the optimal policy, including debt claim dilution, underinvestment, and asset stripping. After structural estimating the parameters of the model, we are able to measure the agency credit spread at about 39% of the average credit spread in the sample. We show that the shareholders' incentive to deviate from debt policies aimed at maximizing the value of the firm, the 'leverage ratchet effect,' is at least as important as underinvestment, the 'debt overhang effect,' in transferring wealth from debt to equity.

Keywords: corporate credit risk, credit spread, structural models, debt-equity agency conflicts

JEL Classification: G12, G31, G32, E22

Suggested Citation

Gamba, Andrea and Aranda León, Carmen Maria and Saretto, Alessio, The Agency Credit Spread (February 10, 2018). Available at SSRN: or

Andrea Gamba (Contact Author)

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

Carmen Maria Aranda León

University of Navarra - Business ( email )

Edificio Bibliotecas-Este
Pamplona, 31080

Alessio Saretto

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

800 Campbell Road
SM 31
Richardson, TX 75080
United States
972-883-5907 (Phone)


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