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Exploring the agency cost of debt: risk, information flow, and CEO social ties

Author

Listed:
  • Md Miran Hossain

    (University of North Carolina Wilmington)

  • David Javakhadze

    (Florida Atlantic University)

  • David A. Maslar

    (University of Tennessee)

  • Maya Thevenot

    (Florida Atlantic University)

Abstract

Contrary to the findings of prior research that focuses on private loans and bank debt, we find that greater CEO social capital is positively associated with a firm’s cost of public debt. This effect is particularly pronounced for firms in financial distress and firms with a higher probability of default that increase dividends. Examining the channel, we demonstrate that social capital is associated with a reduced use of restrictive covenants, which subsequently amplifies the firm's cost of debt. Collectively, the results support the risk-shifting perspective as a plausible mechanism. Our findings remain robust when considering alternative proxies for social capital, alternative model specifications, and tests for endogeneity.

Suggested Citation

  • Md Miran Hossain & David Javakhadze & David A. Maslar & Maya Thevenot, 2025. "Exploring the agency cost of debt: risk, information flow, and CEO social ties," Review of Quantitative Finance and Accounting, Springer, vol. 64(2), pages 505-536, February.
    • Handle: RePEc:kap:rqfnac:v:64:y:2025:i:2:d:10.1007_s11156-024-01312-1
    DOI: 10.1007/s11156-024-01312-1
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    More about this item

    Keywords

    Social capital; Social networks; Cost of debt; Risk-shifting;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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