Do Decision Makers' Debt-risk Attitudes Affect the Agency Costs of Debt?



Current Agriculture, Food & Resource Issues

G. Hailu, E. W. Goddard and S. R. Jeffrey

subjective norm increases the probability of intending to borrow to finance business
expansion. This may suggest that individuals with higher social influence from referents
(i.e., colleagues, spouse, etc.) are less likely to approve additional borrowing for business
expansion. Age and income have statistically significant negative effects on the
probability of intention to finance business expansion through borrowing. Older sample
respondents are less likely to approve additional borrowing for business expansion.
Higher income category respondents are also less likely to approve, which could be the
case because of the positive correlation between age and income for the sample
respondents.

Summary and Conclusions

For the sample respondents, there are statistically significant differences in attitudes
toward long-term borrowing between managers and directors. These differences may
result in agency problems emanating from conflicting preferences. The differences, if not
resolved, may result in significant costs related to resolving conflicts (agency costs) or
may hamper the success of the co-operative business. The conflicts of preference among
decision makers may delay the process of decision making and, hence, may negatively
affect actual business performance.

Results from the ordered probit model suggest that those respondents who have
favourable attitudes toward long-term borrowing, are subject to social influence from
referents and gamble frequently are more likely to intend to increase long-term borrowing
to support business expansion.

Findings from this study have several managerial implications. First, given results
from other studies (e.g., agency costs, as discussed in Hailu et al., 2004), differences in
DMs’ attitudes toward debt and risk may affect corporate financial risk management.
Tufano (1998) found that the level of managerial risk aversion affected corporate risk
management policy in the North American gold mining industry. Demsentz and Lehn
(1985) and Jensen and Meckling (1976) stated that if managers’ holdings are substantial,
their motivations become aligned with those of shareholders and the agency problem is
reduced. In the case of a co-operative business, where managers have no equity holdings
in the business, the motivations of managers and directors may not be very well aligned.
Thus, differences in risk attitudes may be expected. Second, acknowledging and aligning
differing DMs’ attitudes through technical support may facilitate the optimization of the
overall co-operative goals. Hence, evidence from the survey may suggest a need for
technical support for co-operative decision makers in the area of financial risk
management.

Although the results from this study may not be conclusive due to the small sample
size, it may provide direction and suggestions for future research. Further research is
warranted to assess the degree to which manager-director differences in attitude toward
long-term borrowing affect the success of the business. As well, does this result extend to

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