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A Structural Econometric Investigation of the Agency Theory of Financial Structure

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Author Info
Bruno Biais (Toulouse University)
Christophe Bisiere (Universite de Perpignan)
Jean-Paul Decamps (University of Toulouse 1)

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Abstract

We estimate a structural model of financing choices in presence of managerial moral hazard, financial distress costs and taxes. In the theoretical model, firms with low cost of managerial effort, and high financial distress costs and non--debt tax shields, find it optimal to issue equity. Correspondingly the likelihood that a given firm issues equity is the probability that its managerial cost of effort is below an upper bound, reflecting its financial distress cost and non debt tax shields, as well as the other deep parameters of the model. Similarly we characterize the likelihood of issues of debt and convertible bonds. Using maximum likelihood analysis, we confront this theoretical model to data on financing choices by French firms in 1996. We find large costs of financial distress, equal on average to 41.2\% of the value of the firm when it is in distress. We also find large agency costs, equal to 40.26\% of the value of the investment project. In contrast, we find that tax shields do not play a significant role in the financing decision.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0817.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0817

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  3. Jung, Kooyul & Yong-Cheol, Kim & Stulz, Rene M., 1996. "Timing, investment opportunities, managerial discretion, and the security issue decision," Journal of Financial Economics, Elsevier, vol. 42(2), pages 159-185, October. [Downloadable!] (restricted)
  4. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
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  8. Gilchrist, S. & Himmelberg, C.P., 1995. "Evidence on the Role of Cash Flow for Investment," Papers 95-29, Columbia - Graduate School of Business.
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  9. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October. [Downloadable!] (restricted)
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  11. Heinkel, Robert & Zechner, Josef, 1993. "Financial Distress and Optimal Capital Structure Adjustments," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 2(4), pages 531-65, Winter.
  12. Michael J. Barclay & Clifford W. Smith & Ross L. Watts, 1995. "The Determinants Of Corporate Leverage And Dividend Policies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 4-19. [Downloadable!] (restricted)
  13. Gregor Andrade & Steven N. Kaplan, 1998. "How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed," Journal of Finance, American Finance Association, vol. 53(5), pages 1443-1493, October. [Downloadable!] (restricted)
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  14. Bruno Biais & Catherine Casamatta, 1999. "Optimal Leverage and Aggregate Investment," Journal of Finance, American Finance Association, vol. 54(4), pages 1291-1323, 08. [Downloadable!] (restricted)
  15. Harris, Milton & Raviv, Artur, 1985. " A Sequential Signalling Model of Convertible Debt Call Policy," Journal of Finance, American Finance Association, vol. 40(5), pages 1263-81, December. [Downloadable!] (restricted)
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  1. Calcagno, R., 2000. "Is leverage effective in increasing performance under managerial moral hazard?," Discussion Paper 101, Tilburg University, Center for Economic Research. [Downloadable!]
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