Agency Cost and Debt Financing: Evidence From Developing Countries

ABSTRACT In this article, we investigate the valuation effect of debt financing in the context of corporate agency problems. Utilizing debt financing announcements obtained from the news search in 19 emerging markets, we find that the announcement returns on new debts are positively associated with corporate agency costs measured by the ownership held by controlling shareholders who are affiliated with management and family members. These results are particularly strong in companies lacking other corporate governance mechanisms. We also identify that creditors’ monitoring serves as a channel for value creation by efficient investments in mergers and acquisitions. Overall, our results shed light on the disciplinary role of creditors in the emerging markets, where extreme agency problems between controlling and non‐controlling shareholders are prevalent.