Twin Agency Problems and Debt Management around the World

Abstract

This study examines the impact of twin agency problems (political corruption and minority shareholders’ expropriation) on corporate debt management policies across a large number of countries. Our results show that in more corrupt countries, managers are more likely to shield liquid assets from potential political extraction by maintaining a higher level of leverage. This effect is magnified by the protection of shareholders’ rights. We further show that twin agency problems influence not only the level of debt in capital structures but also other aspects of debt management, including debt maturity, deviation from optimal leverage, capital structure stability, and the leverage speed of adjustments. The findings are robust due to their inclusion of different measures of corruption and a wide range of firm-level and country-level characteristics. Our study has implications for policymakers, as we show that the improvement of the country-level institutional environment and, particularly, addressing corruption can lead to more effective debt management by firms, ultimately resulting in higher firm values.