Exploring the agency cost of debt: risk, information flow, and CEO social ties

Md Miran Hossain (), David Javakhadze (), David A. Maslar () and Maya Thevenot ()
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Md Miran Hossain: University of North Carolina Wilmington
David Javakhadze: Florida Atlantic University
David A. Maslar: University of Tennessee
Maya Thevenot: Florida Atlantic University

Review of Quantitative Finance and Accounting, 2025, vol. 64, issue 2, No 1, 505-536

Abstract: Abstract Contrary to the findings of prior research that focuses on private loans and bank debt, we find that greater CEO social capital is positively associated with a firm’s cost of public debt. This effect is particularly pronounced for firms in financial distress and firms with a higher probability of default that increase dividends. Examining the channel, we demonstrate that social capital is associated with a reduced use of restrictive covenants, which subsequently amplifies the firm's cost of debt. Collectively, the results support the risk-shifting perspective as a plausible mechanism. Our findings remain robust when considering alternative proxies for social capital, alternative model specifications, and tests for endogeneity.

Keywords: Social capital; Social networks; Cost of debt; Risk-shifting (search for similar items in EconPapers)
JEL-codes: G31 G32 Z13 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11156-024-01312-1

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