ON DEFINING THE AGENCY COSTS OF DEBT

Since Jensen and Meckling [1976] first introduced the concept of an agency cost of debt, most research on the agency cost of debt has centered on who bears these costs. Jensen and Meckling's original contention was that if bondholders have rational expectations, then the owner‐manager should bear the agency costs of debt. The alternative to this explanation was first offered by Barnea, Haugen and Senbet [1981] who claimed that because of the effects of agency costs on the supply of debt, these costs would be borne by the bondholders. Roberts and Viscione [1984] extend the analysis of Barnea, Haugen, and Senbet by including costly tax avoidance on personal and corporate levels to show that the agency costs of debt are shared by bondholders and owner‐managers.