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Shareholder-Manager Alignment and the Cost of Debt

36 Pages Posted: 23 Jan 2007 Last revised: 2 Jun 2015

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Paul Hribar

University of Iowa - Henry B. Tippie College of Business

Yixin Liu

University of New Hampshire

Date Written: January 2015

Abstract

We investigate the influence of shareholder-manager incentive alignment on the cost of debt using a sample of dual-class firms, where managerial voting rights and cash-flow rights can be separated. We find the cost of debt financing increases in managerial voting rights and decreases in cash-flow rights. However, we also find that the amount of leverage increases in managerial voting rights and decreases in cash-flow rights. Together the results suggest that although the cost of debt increases when shareholder and manager interests diverge, the cost of debt relative to the cost of equity declines, making debt more appealing to firms with high potential agency costs of equity.

Keywords: dual-class, cost of debt, agency costs, managerial ownership, shareholder-manager alignment

JEL Classification: G32, G34

Suggested Citation

Billett, Matthew T. and Hribar, Paul and Liu, Yixin, Shareholder-Manager Alignment and the Cost of Debt (January 2015). Available at SSRN: https://ssrn.com/abstract=958991 or http://dx.doi.org/10.2139/ssrn.958991

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Paul Hribar

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

Yixin Liu (Contact Author)

University of New Hampshire ( email )

Durham, NH 03824
United States
603-862-3357 (Phone)

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