The Effect of Capital Structure When Expected Agency Costs are Extreme

Campbell Harvey (), Karl Lins and Andrew H. Roper

No 8452, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide new evidence that debt creates shareholder value for firms that face agency costs. Our tests are unique in two respects. First, we focus on a sample of firms with potentially extreme agency problems. We study emerging market firms where the routine use of pyramid ownership structures provides an acute separation of management cash flow rights and control rights. Second, we argue that not all debt is the same. Using new data on global debt issuance, we find that the type of debt that positively impacts shareholder value is the type that closely monitors management. This combination of a sample of firms with extreme expected agency problems and detailed information on the different types of debt allows us to construct powerful tests of whether debt can mitigate the effects of agency and information problems. Among other results, we find that the abnormal returns resulting from syndicated term loans (which provide monitoring) are significantly related to the extent of the separation of ownership and control. Our results are consistent with the idea that debt creates value because it reduces the agency costs associated with overinvestment.

JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2001-09
New Economics Papers: this item is included in nep-acc and nep-mic
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published as Harvey, Campbell R., Karl V. Lins and Andrew H. Roper. "The Effect Of Capital Structure When Expected Agency Costs Are Extreme," Journal of Financial Economics, 2004, v74(1,Oct), 3-30.

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