Corporate governance and the agency costs of debt and outside equity

The agency literature identifies two critical principal-agent problems in the context of the firm. On one hand, the separation of ownership and control may lead management to seek private benefits rather than maximize shareholder value. On the other, shareholders may themselves expropriate creditors by increasing risk. This dissertation examines the effectiveness of the tools available to the principals in each of these conflicts to mitigate agency costs. The first half of the thesis focuses on the creditor-shareholder conflict in the context of corporate restructuring. Chapter 2 provides a comprehensive review of existing research on how bondholders respond to restructuring events. Chapter 3 shows that cross-country differences in governance and legal standards are a key determinant of bondholder response to mergers and acquisitions. The second half of the thesis reexamines the effectiveness of two agency mechanisms available to shareholders to contain managerial discretion. Chapter 4 reopens the debate on the substitutability of dividends and shareholder control as alternative agency devices, by showing how ownership and the use of anti-shareholder provisions affect the dividend behavior of Dutch firms. The final Chapter 5 examines the US proxy process, and provides evidence on the much-debated effectiveness of shareholder proposals in mitigating agency problems.