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Sinking Funds and the Agency Costs of Corporate Debt
Author(s) -
Kao Chihwa,
Wu Chunchi
Publication year - 1990
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1990.tb01290.x
Subject(s) - agency cost , agency (philosophy) , incentive , business , debt , information asymmetry , bond , finance , empirical evidence , monetary economics , accounting , economics , microeconomics , corporate governance , philosophy , epistemology , shareholder
This paper examines whether a firm's sinking fund decision is affected by agency costs. The paper argues that sinking funds can be an effective device to resolve the problems of information asymmetry, risk incentives, and suboptimal investments. Empirical tests are provided. Results show that firms with certain characteristics related to agency problems tend to adopt a sinking fund provision in the bond indenture.