Impact of Debt on Agency Costs in Capital Structure Decisions

XYZ Corporation is considering a new financing strategy in light of its recent growth. The management team is concerned about the potential agency costs that may arise from the choice between equity financing and debt financing. The firm currently has a high level of insider ownership, which they believe could mitigate some agency issues. However, they are unsure how their capital structure decision might impact agency costs between shareholders and management.

The CFO has asked the team to assess the implications of this financing choice on agency costs. Specifically, they want to understand how the use of debt could potentially align the interests of management with those of the shareholders.