Date of Award
Doctor of Philosophy
J David Spiceland
Charlene P Spiceland
James J Lukawitz
Albert A Okunade
The conflict between bondholders and shareholders has been an important issue in financial research. However, measuring this conflict continues to be problematic. Common proxies for bondholder-shareholder conflit capture variation from multiple constructs, which makes it unclear as to the interpretation of statistical tests based on these proxies. In order to test empirical hypotheses, a reliable proxy is needed. This dissertation will attempt to bridge this gap in the literature by demonstrating a method to create a direct empirical proxy for the conflict between bondholders and shareholders. The proxy is subjected to a variety of validity tests to determine whether it behaves as predicted by theory.First, this dissertation will construct an empirical proxy for bondholder-shareholder conflict. The proxy is calculated using a two-step regression procedure. In the first step, determinants of leverage are regressed on leverage. The residuals from this regression are used to represent conflict between bondholders and shareholders. This proxy is validated in multiple contexts to assess its robustness with respect to various estimation methods and empirical settings.Second, the dissertation will test whether conflict affects the established relationsship between Accruals Quality and the Cost of Capital. Previous literature (Myers 1977, Black 1976, among others) has established a theoretical link between conflict and optimal capital structure. Ahmed et al. (2002) establishes a relationship between conflict and accounting conservatism. This leaves an open question as to the nature of the relationship between conflict, accruals quality, and the cost of capital. Managers may be less likely to manipulate accruals when conflict is high due to the increased costs of capital from low-quality earnings. Manipulation of earnings also can serve to exacerbate the conflict between bondholders and shareholders by changing the information environment of the firm Bondholders will be less likely to trust financial information in determining the level of asset substitution that the firm is engaged in. Thus, accruals quality has a direct effect on cost of capital as previously shown (see Francis et al., 2004), but also has an indirect effect through how it affects bondholder-shareholder conflict.Third, this dissertation will test whether conflict affects the relationship between real earnings management and cost of capital. From Roychowdhury (2006), real earnings management is the manipulation of business activities in order to influence accounting reporting outcomes. Kim and Sohn (2013) show that real earnings management affects the cost of capital for a firm. Further, both underinvestment and asset substitution relate to a firm's risk position with respect to its assets. Overproduction of inventory aligns with asset substitution. The firm's assets have been made illiquid by overproduction of inventory. If the firm is able to sell the additional inventory, the reduction in costs will provide the firm more profit. If the firm is unable to sell this inventory, the firm will realize increased losses. Thus, real earnings management can increase the conflict between bondholders and shareholders. With the knowledge that conflict affects the firm's cost of capital, it is intuitive that real earnings management could have an indirect effect on the cost of capital through its effect on conflict.
dissertation or thesis originally submitted to the local University of Memphis Electronic Theses & dissertation (ETD) Repository.
Njoroge, Phillip Kamau, "The Effects of Bondholder-Shareholder Conflict on the Relationship Between Earnings Quality and Optimal Capital Structure" (2015). Electronic Theses and Dissertations. 1225.