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Agency Problems and Its Impact and Relevance on Firms Borrowings

This paper provides a critical review on the relevance and impact of agency problems and its impact on the borrowing levels of firms. We provide a brief look at the fundamental theoretical predictions from a basic framework established in the literature. Furthermore, we discuss the implications of the conflicts between managers and shareholders as well as shareholders and debtholders. The empirical literature provides some interesting insights on the potential mechanisms that can be used to reduce agency problems which range from managerial incentives, concentration of shareholders as well as the level, nature and maturity of debt. The findings are however inconclusive on the ability of such mechanisms to effectively control agency problems and subsequently reduce agency costs. Thus the issues highlighted remain unresolved and leaves ample room for future researchers.