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A Structural Econometric Investigation of the Agency Theory of Financial Structure

  • Bruno Biais

    (Toulouse University)

  • Christophe Bisiere

    (Universite de Perpignan)

  • Jean-Paul Decamps

    (University of Toulouse 1)

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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  1. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  2. 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.
  3. 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.
  4. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
  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.
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  7. 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.
  8. 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.
  9. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
  10. Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
  11. Heinkel, Robert & Zechner, Josef, 1993. "Financial Distress and Optimal Capital Structure Adjustments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(4), pages 531-65, Winter.
  12. Stein, Jeremy C., 1992. "Convertible bonds as backdoor equity financing," Journal of Financial Economics, Elsevier, vol. 32(1), pages 3-21, August.
  13. MacKie-Mason, Jeffrey K, 1990. " Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-93, December.
  14. Bruno Biais & Catherine Casamatta, 1999. "Optimal Leverage and Aggregate Investment," Journal of Finance, American Finance Association, vol. 54(4), pages 1291-1323, 08.
  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.
  16. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
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