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Article
Publication date: 7 January 2019

Karren Lee-Hwei Khaw

This study aims to examine the relation between long-term debt and internationalization in the presence of the agency costs of debt and business risk.

Abstract

Purpose

This study aims to examine the relation between long-term debt and internationalization in the presence of the agency costs of debt and business risk.

Design/methodology/approach

Sample firms consist of 517 non-financial listed firms in Malaysia, with 4,197 firm-year observations from the year 2000 to 2014. This study uses panel data regressions and a series of robustness tests to examine the hypotheses.

Findings

The results show that multinational corporations (MNCs) are more likely to sustain less long-term debt than domestic corporations (DCs) to mitigate the costs related to agency problem and firm risk. Meanwhile, foreign-based MNCs maintain less long-term debt than local-based firms, and the finding is more significant at a higher degree of internationalization. Robustness tests confirm the negative relations.

Research limitations/implications

The findings indicate that the ongoing debate on the debt financing puzzle can be explained by internationalization. Moreover, the findings suggest that in addition to the systematic differences between MNCs and DCs, studies on the debt financing and internationalization should also account for the systematic differences among MNCs such as the local-based MNCs, foreign-based MNCs and DCs that later expand their business operations abroad.

Practical implications

MNCs have to be responsive to the diverse institutional environments as they diversify their business operations geographically. When the adverse effects of internationalization outweigh the benefits, MNCs could use the long-term debt financing decision to mitigate the costs of doing business abroad. This is because debt financing is also a primary concern in the corporate financial decisions for the maximization of shareholders’ wealth.

Originality/value

This study contributes to the debt financing literature from the international perspective by providing evidence from an emerging market. In addition, this study highlights the importance of recognizing firms by their firm-specific characteristics, such as internationalization, given the systematic differences among firms.

Details

Journal of Asia Business Studies, vol. 13 no. 1
Type: Research Article
ISSN: 1558-7894

Keywords

Article
Publication date: 1 February 1986

Raymond F. Gorman

Since Jensen and Meckling [1976] first introduced the concept of an agency cost of debt, most research on the agency cost of debt has centered on who bears these costs. Jensen and…

Abstract

Since Jensen and Meckling [1976] first introduced the concept of an agency cost of debt, most research on the agency cost of debt has centered on who bears these costs. Jensen and Meckling's original contention was that if bondholders have rational expectations, then the owner‐manager should bear the agency costs of debt. The alternative to this explanation was first offered by Barnea, Haugen and Senbet [1981] who claimed that because of the effects of agency costs on the supply of debt, these costs would be borne by the bondholders. Roberts and Viscione [1984] extend the analysis of Barnea, Haugen, and Senbet by including costly tax avoidance on personal and corporate levels to show that the agency costs of debt are shared by bondholders and owner‐managers.

Details

Studies in Economics and Finance, vol. 10 no. 2
Type: Research Article
ISSN: 1086-7376

Article
Publication date: 18 January 2008

Chrisostomos Florackis

This paper aims to extend the empirical literature on the determinants of agency costs by using a large sample of UK listed firms.

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Abstract

Purpose

This paper aims to extend the empirical literature on the determinants of agency costs by using a large sample of UK listed firms.

Design/methodology/approach

The paper investigates the impact of several corporate governance mechanisms on two alternative proxies for agency costs, namely the ratio of total sales to total assets (asset turnover) and the ratio of selling, general and administrative expenses to total sales (SG&A). The analysis depends on a cross‐sectional regression approach.

Findings

The results reveal that the capital structure characteristics of firms, namely bank debt and debt maturity, constitute important corporate governance devices for UK companies. Also, managerial ownership, managerial compensation and ownership concentration are strongly associated with agency costs. Finally, the results suggest that the impact exerted by specific internal governance mechanisms on agency costs varies with firms' growth opportunities.

Originality/value

The analysis adds to the empirical literature on agency costs by providing useful insights into how debt maturity and managerial compensation can help mitigate agency‐related problems. It also highlights important interactions between internal governance mechanisms and firm growth opportunities.

Details

International Journal of Managerial Finance, vol. 4 no. 1
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 7 December 2020

Olanike Akinwunmi Adeoye, Sardar MN Islam and Adeshina Israel Adekunle

Determining the optimal capital structure becomes more complicated by the presence of an agency problem. The issuance of debt as a corporate governance mechanism introduces the…

Abstract

Purpose

Determining the optimal capital structure becomes more complicated by the presence of an agency problem. The issuance of debt as a corporate governance mechanism introduces the asset substitution problem – the agency cost of debt. Thus, there is a recognized need for models that can resolve the agency problem between the debtholder and the manager who acts on behalf of the shareholder, leading to optimal capital structure choice, and enhanced firm value. The purpose of this paper is to model the debtholder-manager agency problem as a dynamic game, resolve the conflicts of interests and determine the optimal capital structure.

Design/methodology/approach

As there is no satisfactory model for dealing with the above issues, this paper uses a differential game framework to analyze the incongruity of interests between the debtholder and the manager as a non-cooperative dynamic game and further resolves the conflicts of interests as a cooperative game via a Pareto-efficient outcome.

Findings

The optimal capital structure required to minimize the marginal cost of the agency problem is a higher use of debt, lower cost of equity and withheld capital distributions. The debtholder is also able to enforce cooperation from the manager by providing a lower and stable cost of debt and a greater debt facility in the overtime framework.

Originality/value

The study develops a new dynamic contract theory model based on the integrated issues of capital structure, corporate governance and agency problems and applies the differential game approach to minimize the agency problem between the debtholder and the manager.

Details

Journal of Modelling in Management, vol. 16 no. 4
Type: Research Article
ISSN: 1746-5664

Keywords

Article
Publication date: 2 May 2017

Brady Brewer and Allen M. Featherstone

The purpose of this paper is to examine how debt affects the cost structure of a farm. Agency costs arise when stakeholders of a farm manage their farm differently to obtain debt…

Abstract

Purpose

The purpose of this paper is to examine how debt affects the cost structure of a farm. Agency costs arise when stakeholders of a farm manage their farm differently to obtain debt which results in inefficiencies. These inefficiencies cause a farm to deviate from cost minimization strategies.

Design/methodology/approach

This study uses the non-parametric technique of data envelopment analysis. Through this method, a non-stochastic cost frontier is constructed where all farms must lie on or above the frontier. This allows for the analysis of how debt affects the shape of the cost frontier and for how debt affects deviations away from cost-minimizing strategy. The shadow costs of the debt constraints in the linear programming problem are used to analyze the effect of debt at the cost frontier while a series of Tobit models are estimated to examine the effect of debt on deviations away from the frontier.

Findings

The findings of this paper support the existence of agency costs associated with debt for Kansas farms. The addition of debt and capital constraints lowered the minimum cost frontier increasing the average efficient cost under variable returns to scale. However, for those farms on the frontier, the shadow cost of debt was negative meaning an increase in debt would lower the overall variable cost. The increase of debt was found to be negatively correlated to the efficiency score of the farms.

Originality/value

This paper provides value by supporting the existence of agency costs which has been disagreed upon in the literature and also providing new insights for how to analyze agency costs. Since debt was found to have a negative shadow value for those farms on the frontier but negatively correlated with efficiency scores, this suggests that agency costs affect firms differently depending on where the farm is on the cost frontier.

Details

Agricultural Finance Review, vol. 77 no. 1
Type: Research Article
ISSN: 0002-1466

Keywords

Article
Publication date: 30 April 2020

Shayan Farhangdoust, Mahdi Salehi and Homa Molavi

The purpose of the present paper is to examine the trade-off relationship between managerial ownership and corporate debts and whether this relationship is moderated by ownership…

Abstract

Purpose

The purpose of the present paper is to examine the trade-off relationship between managerial ownership and corporate debts and whether this relationship is moderated by ownership structure and corporate tax rates, particularly in a transition and emerging market whose unique institutional characteristics considerably differ from those prevailing both in the West and East markets.

Design/methodology/approach

This research is semi-empirical in terms of method and practical in terms of purpose. The authors test their hypotheses by using simultaneous equations system methodology with two- and three-stages least squares regression (2SLS and 3SLS) and panel data technics on a sample of 952 listed companies on the Tehran Stock Exchange during 2011-2018.

Findings

The findings indicate that, contrary to the current line of research, there is no trade-off relationship between managerial ownership and debt concerning the reduction of agency costs. Likewise, the study finds no convincing evidence that either the controlling shareholder or the corporate tax rate could influence or moderate this interrelationship. The conjecture lies in the fact that the fundamental environmental variations between the Tehran Stock Exchange and the institutional assumptions underpinning the Western models have led to the formation of such unexpected results.

Research limitations/implications

The implications drawn from this study are constrained by two primary limitations. First, the present study is conducted in an Iranian setting; therefore, the data used for the study only contain companies listed on the Tehran Stock Exchange. The utilization of listed companies on the Tehran Stock Exchange is likely to affect the generalizability of the study in an international context. Second, in this study, we were unable to extend the sample time period because of some major deficiencies in the Tehran Stock Exchange library and its supplementary software. The usage of an extended time period could have provided more generalizable results. However, extended time period, per se, may impair the validity of the results as well.

Originality/value

Because the fundamental institutional assumptions underpinning the Western and even East Asia capital structure models are not valid in the institutional environment of Iran, the findings of this study could provide substantial implications for the understanding of agency costs and capital structure literature. These significant institutional and ownership differences are the factors affecting firms’ leverage and capital choice decisions. Indeed, this study has laid some groundwork upon which a more detailed evaluation of the Iranian firms’ capital structure could be based. In addition, the examination of such relations may provide the ground for sound decision-making by various interested users of financial and accounting information.

Article
Publication date: 7 March 2016

Hafiza Aishah Hashim and Muneer Amrah

The purpose of this study is to determine whether there is any difference in the association among the board of directors, audit committee effectiveness and the cost of debt…

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Abstract

Purpose

The purpose of this study is to determine whether there is any difference in the association among the board of directors, audit committee effectiveness and the cost of debt between the family- and non-family-owned companies in the Sultanate of Oman.

Design/methodology/approach

This study uses a panel data set that has multiple observations on the same economic units. Each element has two subscripts: the group identifier, i (68 companies listed on the Muscat Securities Market), and within the group index denoted by t, which identifies time (2005-2011). The regression model of this study is based on the random effects model, which, according to the Hausman and Breusch-Pagan (LM) (Breusch and Pagan, 1980) tests, is an appropriate model.

Findings

This study finds that the association between a board of directors’ effectiveness and cost of debt is negative and significant for the full sample and non-family firms. This relationship, however, is weak and not significant for family firms. Additionally, this study indicates that audit committee effectiveness has a significant effect on the cost of debt based on the full sample and family firms, but is not significant for non-family firms.

Originality/value

This study examines firms in the Sultanate of Oman, where family ownership control is common. Based on a framework conceptualized according to the agency theory, using data from Oman enables a comparison between family and non-family firms with respect to the effect of the board of directors’ and audit committee’s characteristics as a composite measure. This composite measure captures their combined effect on the propensity of the cost of debt.

Details

Managerial Auditing Journal, vol. 31 no. 3
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 1 February 1996

James W. Wansley, M. Cary Collins and Amitabh S. Dutta

Recent studies have shown that the level of insider holdings and firm value are related in a nonlinear manner. Other studies find that the level of debt in a firm's capital…

Abstract

Recent studies have shown that the level of insider holdings and firm value are related in a nonlinear manner. Other studies find that the level of debt in a firm's capital structure declines with increases in its growth options. The principal‐agent relationship maintains that an increase in the equity stake of insiders reduces the agency costs of issuing debt. Extension of this premise suggests, however, that the agency costs of debt rise with extremely high levels of insider holdings as insiders consume perquisites to the detriment of outside stakeholders, revealing a nonlinear relation attributable to agency costs. We examine the relation between debt financing and insider holdings for 1894 firms at the end of 1989. In keeping with the hypothesized relation, the cross‐sectional regressions of leverage on insider holdings reveal significant nonlinearities. Leverage first rises with insider holdings and then declines. The positive relation between leverage and insider holdings returns as inside ownership approaches 100 percent. These results hold for two different measures of leverage and after controlling for industry differences in leverage, tax shields, firm size, growth options, and earnings or return volatility. The results also hold when regulated firms are excluded from the analysis.

Details

Managerial Finance, vol. 22 no. 2
Type: Research Article
ISSN: 0307-4358

Article
Publication date: 19 November 2007

Yong H. Kim Ph., Jong C. Rhim and Daniel L. Friesner

This paper examines the interrelationships among debt policy, dividend policy, and ownership structure using a simultaneous equation framework. Our approach allows us to test both…

1194

Abstract

This paper examines the interrelationships among debt policy, dividend policy, and ownership structure using a simultaneous equation framework. Our approach allows us to test both the convergence of interests theory and entrenchment theory. Using a sample of publicly traded South Korean manufacturing firms, we find that debt policy and ownership structure have a positive impact on dividend policy. We also find that both debt and dividend policy are positively related to ownership structure. Our findings support both the theory of convergence of interests between management and ownership and entrenchment theory, and also explain why many studies have found conflicting results.

Details

Multinational Business Review, vol. 15 no. 3
Type: Research Article
ISSN: 1525-383X

Keywords

Article
Publication date: 9 May 2008

Giacomo Morri and Christian Beretta

Unlike previous studies on capital structure decisions, the purpose of this paper is to focus on US real estate investment trusts (REITs) in order to find out the main…

2801

Abstract

Purpose

Unlike previous studies on capital structure decisions, the purpose of this paper is to focus on US real estate investment trusts (REITs) in order to find out the main determinants of capital structure choice for real estate companies and in order to verify if they are related to factors similar to those affecting the decisions of public firms in other sectors.

Design/methodology/approach

Using a methodology similar to Rajan and Zingales, a sample of 119 listed REITs with different investment strategies and in different property sectors was analyzed. The analysis is carried out in order to determine the basic factors underpinning the capital structures by selecting financial items and ratios related with leverage (such as asset size, profitability ratios, tangibility of assets, growth opportunities, operating risk and geographical diversification of investments).

Findings

Results show that REITs follow a pecking order theory of financing since more profitable firms are less levered and REITs with more growth opportunities have higher leverage ratios. The tangibility of assets turns out to be positively correlated with leverage, while REITs whose operating risk is high prefer a lower financial risk and consequently a lower gearing. Finally, it is not clear how size affects leverage decisions and more diversified REITs appear to be riskier.

Originality/value

The research also addresses the issue of asymmetric information and the debt‐equity choice for REITs sampled on the basis of their size, highlighting differences with other business sectors.

Details

Journal of European Real Estate Research, vol. 1 no. 1
Type: Research Article
ISSN: 1753-9269

Keywords

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