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The Agency Advantage of Debt over the Lifecycle of the Firm

Author

Listed:
  • Ed Vos

    (University of Waikato)

  • Carolyn Forlong

    (University of Waikato)

Abstract

The question of an `optimal' capital structure of a firm has been studied for publicly listed businesses for years. From these studies, agency theory has emerged as a good way to understand a firm's capital structure. This paper empirically examines the role that agency theory plays in determining the capital structure of businesses as they move from being small unlisted businesses to newly listed on the stock exchange, to being mature listed businesses. The paper finds that debt has a negative agency advantage (defined as reducing agency costs of equity) for small businesses, a significant but minor advantage at the IPO stage, and a significant advantage at the mature listed stage.

Suggested Citation

  • Ed Vos & Carolyn Forlong, 1996. "The Agency Advantage of Debt over the Lifecycle of the Firm," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 5(3), pages 193-211, Fall.
  • Handle: RePEc:pep:journl:v:5:y:1996:i:3:p:193-211
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Agency; Debt; Lifecycle;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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