Open Access Open Access  Restricted Access Subscription or Fee Access
Total views : 1081

Agency Cost, Growth Options, and Debt Maturity in the Indian Corporate Sector

Affiliations

  • Assistant Professor, Department of Commerce, SGTB Khalsa College, University of Delhi, Delhi - 110 007, India
  • Professor, Faculty of Management Studies (FMS), University of Delhi, Delhi - 110 007, India

Abstract


The debt maturity literature has established that agency cost problems, information asymmetry, and liquidity risk are important factors which determine the corporate debt maturity structure. Using panel OLS regression methodology on a panel data of 266 firms drawn from BSE 500, this research paper investigates empirically how agency cost determines debt maturity decisions in the Indian corporate sector. The agency cost hypothesis established that agency problems caused by the conflict of interest between shareholders and bondholders can be mitigated through short-term debt maturity. Therefore, debt maturity is inversely related. The research finds that the coefficient of growth options is positive and significant as against the empirical prediction that debt maturity and growth options are inversely related. However, the positive and significant coefficient on growth options reveals the severity of agency problems in the Indian corporate sector. The research findings lead to the conclusion that debt- equity conflicts over the exercising of growth options are mitigated by not issuing short-term debt. Maturity matching, long-term debt with call and sinking fund provisions, bank debt, secured debt, and debt with covenants are the corporate borrowing strategies adopted by the Indian companies to deal with agency problems, information asymmetry, and liquidity risk.

Keywords

Debt Maturity, Capital Structure, Leverage, Agency Problems, Agency Cost

G32

Paper Submission Date : April 21, 2013 ; Paper sent back for Revision : May 30, 2013 ; Paper Acceptance Date : October 15, 2013.


Full Text:

 |  (PDF views: 9)

References


  • Alcock, J., Finn, F., & Tan, J. K. (2008). Bankruptcy costs, leverage and optimal debt maturity. Accounting & Finance, 52 (2), 313-341. DOI: 10.1111/j.1467-629X.2010.00397.x

  • Antoniou, A., Guney, Y., & Paudyal, K. (2002). Determinants of corporate capital structure : Evidence from European countries (pp. 1-47). Centre for Empirical Research in Finance, Durham Business, School, University of Durham, UK.

  • Barclay, M. J. & Smith Jr., C.W. (1995). The maturity structure of corporate debt. Journal of Finance, 50 (2), 609-631. DOI: 10.1111/j.1540-6261.1995.tb04797.x

  • Barnea, A., Haugen, R.A., & Senbet, L.W. (1980). A rational for debt maturity structure and call provisions in the agency theoretic framework. Journal of Finance, 35(5), 1223-1234. DOI: 10.1111/j.1540-6261.1980.tb02205.x

  • Brick, I. E., & Ravid, S.A. (1985). On the relevance of debt maturity structure. Journal of Finance, 40(5), 1423-1437. DOI: 10.1111/j.1540-6261.1985.tb02392.x

  • Centre for Monitoring Indian Economy Pvt. Ltd. (CMIE). Secondary data. Retrieved from http:/www.prowess,cmie.com/databse2000-2009

  • Deesomsak, R., Paudyal, K., & Pescetto, G. (2005). Determinants of Debt maturity in Evidence from Asia Pacific Regions (pp. 1-41). Centre for Empirical Research in Finance, Durham Business, School, University of Durham, UK.

  • Dennis, S. A., & Sharpe, I.G. (2005). Firm size dependence in the determinants of bank term loan maturity. Journal of Business Finance and Accounting, 32(1-2), 31-64. DOI: 10.1111/j.0306-686X.2005.00587.x

  • Diamond, D. W. (1991). Debt maturity structure and liquidity risk. The Quarterly Journal of Economics, 106 (3), 709-737. DOI: 10.2307/2937924

  • Fama, E. F. (1985). What's different about banks? Journal of Monetary Economics, 15 (1), 29-39.

  • Flannery, M. J. (1986). Asymmetric information and risky debt maturity choice. Journal of Finance, 41 (1), 19-37. DOI: 10.1111/j.1540-6261.1986.tb04489.x

  • Geudes, J., & Oppler, T. (1996). Determinants of the maturity of corporate debt issues. Journal of Finance, 51 (5), 1809-1833. DOI: 10.1111/j.1540-6261.1996.tb05227.x

  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3 (4), 305-360. DOI : http://dx.doi.org/10.1016/0304-405X(76)90026-X

  • Johnson, H., & Stulz, R. (1985). An analysis of secured debt. Journal of Financial Economics, 14, 501-521.

  • Jun, S.- G., & Jen, F.C. (2005). The determinants and implications of matching maturities. Review of Pacific Basin Financial Markets and Policies, 8 (2), 309 - 337.

  • Kane, A., Marcus, A.J., & McDonald, R. L. (1985). Debt policy and the rate of return premium to leverage. Journal of Financial and Quantitative Analysis, 20 (4), 479-499. DOI: http://dx.doi.org/10.2307/2330763

  • Morris, J. R. (1976). On corporate debt maturity strategies. Journal of Finance, 31(1), 29-37. DOI: 10.1111/j.1540-6261.1976.tb03193.x

  • Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5 (2), 147-175. DOI : http://dx.doi.org/10.1016/0304-405X(77)90015-0

  • Smith Jr., C. W., & Warner, J. B. (1979). On financial contracting : An analysis of bond covenants. Journal of Financial Economics, 7, 117-161.

  • Stohs, M. H., & Mauer, D. C. (1996). The determinants of corporate debt maturity structure. The Journal of Business, 69 (3), 279-312.

  • Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. Journal of Finance, 43(1), 1-19. DOI: 10.1111/j.1540-6261.1988.tb02585.x


Refbacks

  • There are currently no refbacks.