Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-15T13:08:41.991Z Has data issue: false hasContentIssue false
  • English
  • Français

Bankruptcy and Agency Costs: Their Significance to the Theory of Optimal Capital Structure

Published online by Cambridge University Press:  06 April 2009

Robert A. Haugen  and
Lemma W. Senbet
Get access Rights & Permissions [Opens in a new window]

Abstract

We support and generalize our original results (1978) in light of potential impediments to a pure market solution to agency problems and potential causal links between liquidation and bankruptcy. In the case of bankruptcy costs, market impediments are easily eliminated through the inclusion of simple provisions in corporate charters and bond indentures. Further, we demonstrate that recent attempts to link liquidation costs to capital structure are without merit. If the firm is to be liquidated on the basis of a rule other than one that maximizes the total value of all the claimants, arbitrage profits arise, and informal reorganization will discipline management to follow the liquidation rule that is optimal for existing securityholders. Also, we find that the pure market solution is not readily generalizable to other classes of agency problems, particularly the risk incentive problem. However, the alternative solution of the risk incentive problem through complex financing contracting may be useful in explaining complexities in contemporary financial contracts.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 1 , March 1988 , pp. 27 - 38
Copyright
Copyright © School of Business Administration, University of Washington 1988

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Allen, F. “Capital Structure and Imperfect Competition in Product Markets.” Working Paper, Univ. of Pennsylvania (1986).Google Scholar
Altman, E. “A Further Investigation of the Bankruptcy Cost Question.” Journal of Finance, 39 (09 1984), 1067–1089.CrossRefGoogle Scholar
Barnea, A.; Haugen, R.; and Senbet, L.. Agency Problems and Financial Contracting. Englewood Cliffs, NJ: Prentice Hall (1985).Google Scholar
Barnea, A.; Haugen, R.; and Senbet, L.. “A Rationale for Debt Maturity Structure and Call Provisions in the Agency Theoretic Framework.” Journal of Finance, 35 (12 1986), 1223–1234.CrossRefGoogle Scholar
Brennan, M. “Costless Financing Policies under Asymmetric Information.” Working Paper, Univ. of British Columbia (06 1986).Google Scholar
Castanias, R. “Bankruptcy Risk and Optimal Capital Structure.” Journal of Finance, 38 (12 1983), 1617–1635.CrossRefGoogle Scholar
Fama, E. F. “The Effects of a Firm's Investment and Financing Decisions on the Welfare of Its Securityholders.” American Economic Review, 68 (06 1978), 272–284.Google Scholar
Giammarino, R. “The Resolution of Financial Distress.” Working Paper, Univ. of British Columbia (02 1987).Google Scholar
Green, R. “Investment Incentives, Debt, and Warrants.” Journal of Financial Economics, 13 (03 1984), 115–136.CrossRefGoogle Scholar
Green, R., and Talmor, E.. “Asset Substitution and the Agency Costs of Debt Financing.” Journal of Banking and Finance, 10 (10 1986), 391–399.CrossRefGoogle Scholar
Grossman, S., and Hart, O.. “Takeover Bids, the Free Rider Problem, and the Theory of the Firm.” Bell Journal of Economics, 11 (Spring 1980), 42–64.CrossRefGoogle Scholar
Haugen, R., and Senbet, L.. “The Insignificance of Bankruptcy Costs to the Theory of Optimal Capital Structure.” Journal of Finance, 33 (05 1978), 383–393.CrossRefGoogle Scholar
Haugen, R., and Senbet, L.. “New Perspectives on Informational Asymmetry and Agency Relationships.” Journal of Financial and Quantitative Analysis, 14 (11 1979), 671–694.CrossRefGoogle Scholar
Haugen, R., and Senbet, L.. “Resolving the Agency Problems of External Capital through Options.” Journal of Finance, 36 (06 1981), 629–647.CrossRefGoogle Scholar
Jensen, M., and Meckling, W.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 4 (10 1976), 305–360.CrossRefGoogle Scholar
Kim, H. “A Mean-Variance Theory of Optimal Capital Structure and Corporate Debt Capacity.” Journal of Finance, 33 (03 1978), 45–64.Google Scholar
Kraus, A., and Litzenberger, R.. “A State Preference Model of Optimal Financial Leverage.” Journal of Finance, 28 (09 1973), 911–922.Google Scholar
Masulis, R. “The Effects of Capital Structure Change on Security Prices: A Study of Exchange Offers.” Journal of Financial Economics, 8 (06 1980), 139–178.CrossRefGoogle Scholar
Myers, S. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 4 (11 1977), 147–176.CrossRefGoogle Scholar
Ross, S. “The Determination of Financial Structure: The Incentive-Signalling Approach.” Bell Journal of Economics, 8 (Spring 1977), 23–40.CrossRefGoogle Scholar
Scott, J. “A Theory of Optimal Capital Structure.” Bell Journal of Economics, 7 (Spring 1976), 33–54.CrossRefGoogle Scholar
Smith, C, and Warner, J.. “On Financial Contracting: An Analysis of Bond Covenants.” Journal of Financial Economics, 7 (06 1979), 117–161.CrossRefGoogle Scholar
Titman, S. “The Effects of Capital Structure on a Firm's Liquidation Decision.” Journal of Financial Economics, 13 (03 1984), 137–151.CrossRefGoogle Scholar
Warner, J. “Bankruptcy Costs: Some Evidence.” Journal of Finance, 32 (05 1977), 239–276.CrossRefGoogle Scholar
Webb, D. “The Importance of Incomplete Information in Explaining the Existence of Costly Bankruptcy.” Working Paper, London School of Economics (10 1985).Google Scholar