Measuring the Agency Costs of Debt: A Simplified Approach

This paper provides a model with which the agency costs of debt can be quantitatively analyzed. The bankruptcy cost model in theories of corporate capital structure cannot explain actual financial leverage. This model extends the bankruptcy cost model by considering the agency costs. Simulation shows that the model can realize the likely capital structure for actual firms. Furthermore, for more than 500 firms listed on the Tokyo Stock Exchange, the parameters of the model can be appropriately estimated, and measures of the agency costs of debt are almost consistent with past empirical research concerning the agency costs hypotheses.