Agency Costs, Financial Deregulation, and Corporate Investment - An Euler Equation Approach to Panel Data for Swedish Firms

Hansen Sten and Sara Lindberg
Additional contact information
Hansen Sten: Ministry of Finance, Postal: SE-103 33 Stockholm, Sweden
Sara Lindberg: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

No 1997:20, Working Paper Series from Uppsala University, Department of Economics

Abstract: This paper studies the influence of debt financing on the investment behavior of firms. The empirical analysis is based on the Euler equation governing the optimal level of investment in the presence of convex adjustment costs of capital as well as agency costs associated with borrowing in imperfect capital markets. Using a large panel of Swedish firms over the period 1979-94, we examine whether agency costs differ between firms of different size and between firms with different retention behavior, and whether Swedish financial deregulation in the mid 1980s helped to reduce these costs. In addition to the structural and highly nonlinear Euler equation, we estimate a linearized version of it. The empirical results support the existence of agency costs, but there is no evidence that these costs would differ between classes of firms, nor that deregulation succeeded in reducing them. It appears, however, that some firms may not only be facing agency costs, but may also be rationed altogether.

Keywords: Investment; agency costs; financial deregulation (search for similar items in EconPapers)
JEL-codes: D92 G31 (search for similar items in EconPapers)
Pages: 45 pages
Date: 1997-08-15
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:uunewp:1997_020

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