Agency costs, asset specificity, and the capital structure of the firm

We develop a dynamic model that incorporates the insights of both the agenc y cost and asset specificity literature about corporate finance. In general , we find that neither can be ignored, and that the optimal capital structu re minimizes agency cost and asset specificity considerations. A key findin g is that the conditions most favorable for reducing transaction costs due to asset specificity are the same as those for reducing the agency costs of debt. Empirically, we find that agency costs and asset specificity are sig nificant determinants of a firm's capital structure in the transportation e quipment and the printing and publishing industries. (C) 2001 Elsevier Scie nce B.V. All rights reserved. JEL classification: G32.