Changes in Corporate Debt Policy: Information Asymmetry and Agency Factors

This paper tests how changes in information asymmetry and agency variables affect changes in debt policy. Unlike previous studies that examine levels of variables to explain what may determine debt policy, we calculate yearly changes in variables to provide a stronger test of causal relations. By examining changes in agency and information variables, we are able to identify factors that cause firms to change their optimal capital structure. We find institutional ownership has become a substitute for debt financing due to increased shareholder activism. In addition, we find support for Jensen's free cash flow theory, mixed support for informational asymmetry, and no support for Jensen and Meckling's agency model.