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The Agency Advantage, of Debt Over the Lifecycle of the Firm Ed VOZ Carolyn FORLONG University of Waikato Department of Finance Private bag 3105 Hamilton, NEW ZEALAND Phone: [phone] Fax: [phone] Abstract The question of an 'optimal' capital structure of a firm has been studied for publicly listed businesses. Agency theory has emerged as a good way to explain why firms pick their capital structure. This paper empirically examines the role that agency theory plays in determining the movement of businesses as they move from being small unlisted businesses to newly listed on the stock exchange, to being mature listed businesses. The paper finds that debt has a negative agency advantage (defined as reducing agency costs of equity) for small businesses, a significant but minor advantage at the IPO stage, and a significant advantage at the mature listed stage. INTRODUCTION Managers often spend much effort determining the optimal level of debt for their particular firm. This task is made more difficult when market and firm factors cause a firm's optimal debt level to vary. Many studies have empirically tested the significance of debt for listed firms, but few have examined the role of debt at different stages of a firm's life cycle. The purpose of this study is to empirically test the agency advantage of debt over the life cycle of the business. The agency advantage of debt is interpreted as the degree that debt benefits the firm by reducing the agency costs of equity. It is expected that the changing market imperfections and ownership structures over the firm life cycle will cause the role of leverage to shift also. The firm life cycle has been divided into three stages: the small business, initial public offering (IPO), and mature-listed stage. Small businesses are defined as unlisted businesses where the owner is also the manager of the firm. IPO firms are those which have listed on the stock exchange in the past year and mature-listed

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