CAN AGENCY COSTS OF DEBT BE REDUCED WITHOUT EXPLICIT PROTECTIVE COVENANTS? THE CASE OF RESTRICTION ON THE SALE AND LEASE-BACK ARRANGEMENT

We explore the determination of debt contracting by testing how the probability of explicit contracting is related to amount to be borrowed and bond feature variables such as maturity, coupon, and bond ratings. Then, we examine the relationship between agency costs and contracting by comparing between two groups of bond: explicit restriction vs. implicit restriction on the sale of asset and/or sale and leaseback transaction. The probability of explicit restriction in place-is positively related to the amount of capital to be raised in support of the hypothesized relationship: the larger the amount of borrowing, the more likely an explicit restriction is to be included in debt contract. The negative coefficient for bond ratings is statistically significant in strong support of the hypothesized negative relationship between the probability of explicit contracting and bond ratings. The larger the agency costs of debt (that is, the lower the bond ratings), the more likely explicit restrictions are in place. Agency costs of debt (for which bond ratings are used as a proxy) are found to be positively related to the amount of issue and maturity, and negatively related to coupon rate and contracting variable. These positive relationships are interpreted as the size of capital to be raised by bond issue tends to be larger for the borrowing firms with lower agency costs of debt; and the longer the maturity, the higher the bond ratings, i.e. the lower agency costs of debt