Agency Cost of Debt: A Case for Supplier Financing

Underinvestment, Debt Financing, and Long-term Supplier Relations

Prior studies have documented that in firm-supplier relations where the firm makes an investment up-front, the profits are exposed to expropriation by the supplier, and results in underinvestment. We analyze such a firm-supplier relation in a bargaining framework, and show that the bargaining power of the firm is positively related to the resale value of its investment, and negatively related t...

The Agency Cost of Alternative Debt Instruments

Investment Reversibility and Agency Cost of Debt

Previous research has argued that debt financing affects equityholders’ investment decisions, producing substantial inefficiency. This paper shows that the size of this inefficiency depends on the degree of investment reversibility. In a dynamic model of financing and investment, the paper provides an upper bound for the inefficiency produced by debt financing. The upper bound is decreasing in ...

Auditor Choice and Cost of Debt Financing for Private SMEs

This study examines relation of the auditor choice and cost of debt financing for private SMEs (small and medium sized enterprises). In particular, it examines whether choice of a certified auditor or reputable international audit firm provides economic value to private SMEs as a factor lowering firms' information problems and cost of debt financing in the capital markets. Using time-series cro...

The Impact of Ownership Structure on Debt Financing of Japanese Firms With the agency cost of Free Cash Flow

This paper, using 833 observations of listed Japanese firms between the years 1992 to 2000, explore the implications of the free cash flow hypothesis concerning the disciplinary role of ownership structure in corporate capital structure policy. The results show (1) The relation between leverage and free cash flow are significantly positive and greater for low-growth firms than for the high-grow...