Agency Conflicts Around the World

We use a dynamic capital structure model to empirically measure agency conflicts across legal environments and decompose their effects into wealth transfers among stakeholders and value losses from policy distortions. Our estimates show that agency costs are large and vary widely across and within countries. Legal origin and provisions for investor protection affect agency costs, but they are more relevant for curtailing governance excesses than guarding the typical firm. Agency costs split about equally into wealth transfers and value losses from financial distortions, the latter being larger where ownership is dispersed. Incentive misalignment captures 60% of country variation in leverage.