Debt dynamic, debt dispersion and corporate governance

What is it about?

We show that there is an inverse relationship between debt concentration/creditors concentration and managerial entrenchment. Firms under weak corporate governance have a higher propensity to use multiple debt types and have a dispersed debt structure. Contrastingly, firms that are well-managed tend to concentrate debt and borrow predominantly from a few creditors. We also find that while bank debt is negatively associated with debt concentration market debt is positively associated with debt concentration.

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Photo by Chris Sabor on Unsplash

Photo by Chris Sabor on Unsplash

Why is it important?

Policymakers and practitioners need to account not only for changes in the firm’s total debt level but also for changes within the firm’s debt composition. Understanding a manager’s choice of debt structure can incentivize creditors to effectively monitor and use debt concentration as a form of commitment device that transfers some control rights from the manager to creditors