Financing valuable investment projects in Japan: agency costs, organizational structure, and debt markets

Abstract

According to the agency hypothesis, corporations choose equity over debt in financing profitable new investments when the potential for conflicts between bondholders and stockholders is high. The Japanese institutional environment permits an examination of the agency hypothesis for

firms with different organizational and debt structures. The negative relation between total debt- equity ratio and growth opportunities observed for U.S. firms in previous research is found only

for non-keiretsu firms and not for firms who are members of a keiretsu group. In addition, the growth opportunities of keiretsu firms are unrelated to their use of long-term debt-equity ratios. These results provide favorable support for the agency hypothesis.