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The effect of capital structure when expected agency costs are extreme

Author: Campbell R Harvey; Karl Lins; Andrew H Roper; National Bureau of Economic Research.
Publisher: Cambridge, MA : National Bureau of Economic Research, ©2001.
Series: Working paper series (National Bureau of Economic Research), working paper no. 8452.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
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  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Campbell R Harvey; Karl Lins; Andrew H Roper; National Bureau of Economic Research.
OCLC Number: 48149915
Notes: "September 2001."
Description: 1 online resource.
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 8452.
Responsibility: Campbell R. Harvey, Karl V. Lins, Andrew H. Roper.

Abstract:

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.

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