The Impact of Corporate Governance Structures on the Agency Cost of Debt

The Impact of Corporate Governance Structures on the Agency Cost of Debt PDF

Author: Mr.Jorge A. Chan-Lau

Publisher: International Monetary Fund

Published: 2001-12-01

Total Pages: 14

ISBN-13: 1451874502

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This paper uses a stochastic continuous time model of the firm to study how different corporate governance structures affect the agency cost of debt. In the absence of asymmetric information, it shows that control of the firm by debtholders with a minority stake delays the exit decision and reduces the underinvestment problem. Such a governance structure may play an important role in diminishing conflicts between shareholders and debtholders.

The Control of Corporate Europe

The Control of Corporate Europe PDF

Author: Fabrizio Barca

Publisher: OUP Oxford

Published: 2001-11-15

Total Pages: 354

ISBN-13: 0191530050

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Written by an international team of authors, this book provides the first systematic account of the control of corporate Europe based on voting block data disclosed in accordance with the European Union's Large Holdings Directive (88/627/EEC). The study provides detailed information on the voting control of companies listed on the official markets in Austria, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, the United Kingdom, and, as a benchmark comparison, the United States. The authors record a high concentration of control of corporations in many European countries with single blockholders frequently controlling more than fifty per cent of corporate votes. In contrast, a majority of UK listed companies have no blockholder owning more than ten per cent of shares, and a majority of US listed companies have no blockholder with more than six per cent of shares. Those chapters devoted to individual countries illustrate how blockholders can use legal devices to leverage their voting power over their cash-flow rights, or how incumbents prevent outsiders from gaining voting control. It is shown that the cultural and linguistic diversity of Europe is (almost) matched by its variety of corporate control arrangements.

Corporate Governance and the Cost of Debt

Corporate Governance and the Cost of Debt PDF

Author: Marc Schauten

Publisher:

Published: 2006

Total Pages: 11

ISBN-13:

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This paper examines the relation between the quality of corporate governance and the cost of debt. This study is based on the idea that debt holders take a firm's corporate governance into account when estimating its default risk. A higher quality would imply a lower cost of debt. The methodology of our study is comparable to Sengupta (1998). We use the Deminor Rating for the year 2000 as a proxy for the quality of corporate governance performance of the 300 largest European firms (FTSE Eurotop 300). Deminor Rating bases its score on approximately 300 criteria, which can be subdivided into four corporate governance categories: rights and duties of shareholders; range of takeover defences; disclosure on corporate governance; and board structure and functioning. As a proxy for the cost of debt we use the yield of 77 bonds issued in the year 2001. After adjusting for issuer characteristics, issue characteristics and market characteristics, we find that corporate governance performance is negatively related to the cost of debt. It shows that firms with strong corporate governance have lower cost of debt financing while firms with a relatively weak corporate governance performance are associated with higher cost of debt financing, with a difference of about 1.4%. The findings support the idea that debt holders use the quality of corporate governance in their assessment of risk profiles of firms. Our results imply - given the in general found positive correlation between corporate governance and equity related measures - good corporate governance pays off for both equity and debt holders.

Tax Avoidance and Capital Structure

Tax Avoidance and Capital Structure PDF

Author: Alessandro Gabrielli

Publisher: Springer Nature

Published: 2023-05-23

Total Pages: 103

ISBN-13: 3031309804

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This book provides a comprehensive overview of the implications of tax avoidance for a firm’s capital structure, highlighting the key role played by free cash flow and agency conflicts. First, the book provides an outline of the theories and empirical evidence concerning the role of taxes in the Theory of Capital Structure. It reviews the studies investigating the relationship between agency conflicts and capital structure. The book explores the role of free cash flow and agency conflicts in the relationship between tax avoidance and capital structure. In the final section, the results of an empirical investigation conducted on a sample of U.S. public firms are also presented. The empirical research examines whether and how tax avoidance is associated with debt covenant violation across the stages of the corporate life cycle. Specifically, the research uses the concept of the corporate life cycle stage to analyse whether and how the association between tax avoidance and debt covenant violation varies in different agency settings. Consistent with the hypotheses drawn on the Agency Theory, the findings of the empirical research suggest life cycle stages moderate the association between tax avoidance and debt covenant violation. Overall, this book sheds light on the potential implications of tax avoidance activities for a firm’s capital structure. The book will be of interest to both experienced and early-stage scholars interested in the topic. Moreover, the book will also be of interest to policymakers, investors, analysts, lenders, and other market participants.

Agency Costs of Stakeholders and Corporate Finance

Agency Costs of Stakeholders and Corporate Finance PDF

Author: Bing Yu

Publisher:

Published: 2009

Total Pages: 132

ISBN-13:

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Agency cost is a major factor that constrains corporate finance decision making. Current corporate governance theory focuses primarily on agency costs of managers and existing literature studies extensively on this aspect. This dissertation studies agency costs from a unique point of view: it addresses the agency costs of creditors and employees. It tests the relationship between creditor rights as well as employee rights and corporations' financing and dividend payment decisions across countries. Based on a sample of 182, 182 firm-year observations from 21,663 unique firms over 52 countries, this study uses the year- and industry-fixed effects Tobit model to test the impacts of creditor rights and labor rights on debt ratio in different countries. The empirical results reveal a positive relationship between employee rights and firms' use of debt and a negative relationship between creditor rights and firm debt ratio. Such relationships hold valid when tests are implemented by using pooled country sample, country mean of residuals, and different country-group sub-samples. The results imply that in countries where employee rights are high, shareholders will use more debt obligation to reduce possibility of exploitation by employees whereas in countries where creditor rights are high, it is harder for shareholders to get a favorable debt contract and they will reduce the use of debt capital. Running fixed effects Logit and Tobit models, this study also documents that labor rights are negatively related to firms' decision to pay dividends and dividend payment amounts. This relationship is reinforced to be more salient in civil law countries where shareholder rights are weak. The empirical results are robust by controlling for sample selection bias, test model specification, and a series of country-level control variables. The explaining power of the major creditor rights and labor rights variables keeps significant statistically, implying that the empirical results remain valid after taking country-specific economic characteristics into account across countries. This is the first study that examines agency costs of employees in corporate finance context explicitly. It takes all stakeholders into account when studying agency problems and sheds light on the interaction relationship among shareholders, creditors, and employees across countries. The empirical results of this study provide a new perspective to interpret international variations in financial leverage and dividend policy in the world.

The COVID-19 Impact on Corporate Leverage and Financial Fragility

The COVID-19 Impact on Corporate Leverage and Financial Fragility PDF

Author: Sharjil M. Haque

Publisher: International Monetary Fund

Published: 2021-11-05

Total Pages: 51

ISBN-13: 1589064127

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We study the impact of the COVID-19 recession on capital structure of publicly listed U.S. firms. Our estimates suggest leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent, while debt maturity increased moderately. This de-leveraging effect is stronger for firms exposed to significant rollover risk, while firms whose businesses were most vulnerable to social distancing did not reduce leverage. We rationalize our evidence through a structural model of firm value that shows lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage. Model-implied optimal leverage indicates firms which did not de-lever became over-leveraged. We find default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID. Additional stress tests predict value of these firms will be less than one standard deviation away from default if cash flows decline by 20 percent.

Directors' Remuneration

Directors' Remuneration PDF

Author: Study Group on Directors' Remuneration

Publisher:

Published: 1995

Total Pages: 82

ISBN-13:

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A complete copy of the Report including the Code of Best Practice. The Study Group on Director's Remuneration was set up on the initiative of the CBI in January 1995 in response to public and shareholder concerns about pay and other remuneration of company directors in the United Kingdom. The report covers code of best practice, main action points, remuneration committees, disclosure, remuneration policy, service contracts and compensation, privatised utilities.

Financial Management and Analysis

Financial Management and Analysis PDF

Author: Frank J. Fabozzi

Publisher: John Wiley & Sons

Published: 2003-07-25

Total Pages: 1023

ISBN-13: 0471488933

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Financial Management and Analysis, Second Edition covers many important financial topics that are neglected elsewhere--from raising funds via securitization to managing a financial institution. This book provides valuable insights into many major aspects of financial management and analysis, and includes expert advice, real-world examples, useful charts and graphs, and incisive end-of-chapter questions that help develop the skill set necessary to deal with the important financial problems encountered in today's business world.

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