DEPP working paper

This Working Paper is part of the Development Economics and Public Policy series

The Costs of Agency: Debt Composition and Diversification Strategy in Indian Industry

Sumit K. Majumdar and Kunal Sen

Abstract

The agency cost theory of the firm predicts that managers will engage in diversification if there are lax internal or external monitoring mechanisms. Previous studies that have examined the effect of capital structure on firm diversification have focused on the structure of equity rather than the structure of debt. In this paper, we test the agency cost perspective on the relationship between debt structure and corporate diversification and find some empirical support for this perspective using a large cross-sectional dataset of firms in India.

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