The Impact of Capital Structure on Agency Costs: Evidence from UK Public Companies

Abstract

This paper aims to provide empirical evidence on the agency costs hypothesis which suggests that increase of leverage may reduce agency costs. Both multivariate tests and univariate tests are employed in this study. The multivariate tests reveal that general relationship between leverage and agency costs is significantly negative. Univariate tests are further used to assess whether agency costs are significantly different when a firm has a relatively higher debt to asset ratio from when it is less leveraged. Similar supporting evidence is found for the agency costs hypothesis. Moreover, results from the univariate tests also indicate that this general negative relationship no longer holds when an extremely high level of leverage is present.

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