(The) determinants of corporate debt policy and the impact of firm size under agency problem framework

Abstract

In recent years, there has been increased theoretical emphasis on the agent-principal problem as it applies to corporate finance. The direction of this thesis is divided into two categories. First, we attempt to empirically test for the existence of the agency costs and their relation to firm``s debt policy in aggregate aspect. The results serve evidences that firms with higher insider ownership have a greater debt ratios than firms with lower insider ownership, that high-growth firms use less debt rather than low-growth firms, but volatility appears to be uncorrelated to debt financing. Also, we find that larger firms have greater debt ratios when compared to smaller firms. This evidence motivates to suggest the Size Impact proposition under agency problem framework. Second, this thesis provides the Size Impact proposition on corporate debt policy based on agency costs of debt. It is shown that the larger the firm, the easier the development of agency problem-resolution instruments, the production of information about firm``s favorable situations, the employment of management with superior information and ability, and the transfer of some portion of the bankruptcy cost of large firm to the government. On these grounds of large firm``s advantageous characteristics, it bears the less agency costs of debt. Hence, the large firm is likely to be highly appreciated than small firm by investors. The implications of this Size Impact proposition is that large firm had better finance more corporate debt than small firm in order to reduce the silly unuse of these opportunities that may increase financier``s surplus.