The Effect of Managerial Ownership on the Cost of Debt: Evidence from Japan

Abstract

This article examines the effect of managerial ownership (MO) on the cost of debt as mea-sured by the interest rate spread on corporate bonds for Japanese firms. First, the authors find that the MO is positively associated with interest rate spread after controlling for the other Japanese ownership structure, cross-shareholdings, and the stable shareholdings by financial institutions. Second, by employing factor analysis to measure the agency cost of debt (ACD) based on financial variables, the authors also find that MO has higher correlation with interest rate spread when the ACD at the time of bond issue is already larger. The results are robust to additional analyses, including the possibility of nonlinear relationship, bond rating, endogeneity problem, and Fama and MacBeth approach. The results suggest that prospective bondholders use MO information to anticipate a firm’s future ACD and esti-mate it higher when the current ACD at issuing bond is already larger. The results also sug-gest that accounting information is useful to estimate the ACD and increase the efficiency of bond contracting. Finally, although previous studies are often prone to emphasizing the find-ings on the Japanese unique ownership structure, the results of this article reveal that tradi-tional agency theory on MO apply to Japanese bond market, which is consistent with the findings of U.S. firms.

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