Chapter

Financial Systems, Markets and Institutional Changes

Part of the series Palgrave Macmillan Studies in Banking and Financial Institutions pp 61-79

Firm-based and Institutional-based Determinants of the Bank Debt Maturity: New Evidence for Developed Countries

  • Eleuterio Vallelado
  • , Paolo Saona
  • , Pablo San Martín

Abstract

The choice between various financial instruments under perfect capital markets is inconsequential to the value of the firm. This basic irrelevancy theorem, originally developed by Modigliani and Miller (1958), covers all types of complexities which commonly characterize financial liabilities. Contributions in the field of finance introduce market imperfections, such as the agency costs of equity and debt, to bridge the gap between theory and the observed reliance of corporations on complex financial instruments. Jensen and Meckling (1976) identify these agency costs as bankruptcy costs associated with managerial consumption of perks, and costs associated with managerial incentive to undertake suboptimal risky projects (Dang, 2011), which transfer wealth from bondholders to shareholders, such as asset substitution problems (Douglas, 2009; Myers, 1977). On the other hand, contributions from the field of law and finance indicate the relevance of institutional setting in the financial decisions of corporations.