Title

The effect of managerial ownership on the cost of debt: Evidence from Japan

Abstract

We examine the effect of managerial ownership on the cost of debt as measured by the interest rate spread on corporate bonds for Japanese firms. First, we find that the managerial ownership is positively associated with interest rate spread after controlling for the other Japanese ownership structure, cross-shareholding and the stable shareholdings by financial institutions. Second, by employing factor analysis to measure the agency cost of debt based on financial variables,we also find that managerial ownership has higher correlation with interest rate spread when the agency cost of debt at the time of bond issue is already larger. The results are robust to additional analyses, including the possibility of non-linear relationship, bond rating, endogeneity problem, and Fama and Macbeth (1973) approach. Our results suggest that prospective bondholders use managerial ownership information to anticipate a firm's future agency cost of debt, and estimate it higher when the current agency cost of debt at issuing bond is already larger. Our results also suggest that accounting information is useful to estimate the agency cost of debt and increase the efficiency of bond contracting. Finally, although previous studies are often prone to emphasizing the findings on the Japanese unique ownership structure, our results reveal that traditional agency theory on managerial ownership is apply to Japanese bond market, which is consistent with the findings of U.S. firms.