The authors investigate a class of agency costs of debt that arise because debt financing affects the firm's incentives to use inputs efficiently. A methodology for estimating this class of costs is presented and applied to a major industry–air transport. The authors' results are consistent with agency models that predict a decrease in efficiency as the debt increases. A part of the loss of efficiency that they identify is attributable to the greater use by levered firms of inputs that can be monitored and are collateralizable.

In this paper we present and estimate a model of economic depreciation consistent with producer's optimization. The estimated economic depreciation, which is a function of the rate of utilization and level of maintenance, is about half of that used according to tax (accounting) depreciation. The difference between the economic and tax rates of depreciation results in a subsidy and earlier capital replacement. The implicit maximum net tax subsidy expressed as a proportion of the acquisition price of the asset is 13.3% for a sample of Canadian trucking firms.

We present an empirical model of firm behavior in the presence of switching costs. Customers' transition probabilities, embedded in firms' value maximization, are used in a multiperiod model to derive estimable equations of a first-order condition, market share (demand), and supply equations. The novelty of the model is in its ability to extract information on both the magnitude and significance of switching costs, as well as on customers' transition probabilities, from conventionally available highly aggregated data which do not contain customer-specific information. As a matter of illustration, the model is applied to a panel data of banks, to assess the switching costs in the market for bank loans. The point estimate of the average switching cost is 4.1%, about one-third of the market average interest rate on loans. More than a quarter of the customer's added value is attributed to the lock-in phenomenon generated by these switching costs. About a third of the average bank's market share is due to its established bank–borrower relationship.

ABSTRACT We investigate a class of agency costs of debt that arise because debt financing affects the firm's incentives to use inputs efficiently. A methodology for estimating this class of costs is presented and applied to a major industry, air transport. Our results are consistent with agency models that predict a decrease in efficiency as the debt increases. A part of the loss of efficiency that we identify is attributable to the greater use by levered firms of inputs that can be monitored and are collateralizable.

This paper studies strategies pursued by banks in order to differentiate their services and soften competition. More specifically we analyze whether bank's ability to avoid losses, its capital ratio, or bank size can be used as strategic variables to make banks different and increase the interest rates banks can charge their borrowers in equilibrium. Using a panel of data covering Norwegian banks between 1993 and 1998 we find empirical support that the ability to avoid losses, measured by the ratio of loss provisions, may act as such a strategic variable. A likely interpretation is that borrowers use high-quality low-loss banks to signal their creditworthiness to other stakeholders. This supports the hypothesis that high-quality banks serve as certifiers for their borrowers. Furthermore, this suggests that not only lenders and supervisors but also borrowers may discipline banks to avoid losses.

This paper shows that borrowers’ ethical behavior leads lending banks to loosen financing conditions when setting loan rates. We advance the banking literature by stressing that the previous financing loosening is enhanced when there is similarity of lenders and borrowers along their ethical domain given that such similarity brings about familiarity and trust in non-opportunistic behavior between them, thereby contributing to lower information frictions. Unique data composed of 12,545 syndicated loan facilities from 19 countries for the period 2003–2007 indicate a 24.8% reduction in the mean spread associated with an increase of one standard deviation in the degree of borrowers’ ethical behavior from its mean value. Such reduction is enhanced to 37.6% when lenders also behave in an ethical way. Results withstand a battery of robustness tests including the use of alternative databases that capture the effect of the 2008 financial crisis, financing alternatives such as equity financing as well as nonparametric estimations.