The Effect of Capital Structure When Expected Agency Costs are Extreme

40 Pages Posted: 15 Aug 2001  

Karl V. Lins

University of Utah - Department of Finance

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Andrew H. Roper

Compass Lexecon

Multiple version iconThere are 2 versions of this paper

Date Written: June 2003

Abstract

This paper conducts powerful new tests of whether debt can mitigate the effects of agency and information problems. We focus on emerging market firms for which pyramid ownership structures create potentially extreme managerial agency costs. Our tests incorporate both traditional financial statement data and new data on global debt contracts. Our analysis is mindful of the potential endogeneity between debt, ownership structure, and value, and takes into account differences in the debt capacity of a firm's assets in place and future growth opportunities. The results indicate that the incremental benefit of debt is concentrated in firms with high expected managerial agency costs that are also most likely to have overinvestment problems resulting from high levels of assets in place or limited future growth opportunities. Subsequent internationally syndicated term loans are particularly effective at creating value for these firms. Our results support the recontracting hypothesis that equity holders value compliance with monitored covenants, particularly when firms are likely to overinvest.

Keywords: capital structure, debt, agency problems, emerging markets, governance

JEL Classification: G31, G32, G34

Suggested Citation

Lins, Karl V. and Harvey, Campbell R. and Roper, Andrew H., The Effect of Capital Structure When Expected Agency Costs are Extreme (June 2003). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=279517 or http://dx.doi.org/10.2139/ssrn.279517

Karl V. Lins (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-3171 (Phone)
801-581-7214 (Fax)

Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Andrew H. Roper

Compass Lexecon ( email )

Mountain View, CA
United States

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