• The authors would like to thank William Baber, Mike Cliff, Christopher Jones, Anzhela Knyazeva, Alexei Ovtchinnikov, Michel Robe, Fei Xie, Jayant R. Kale (the editor), Lubomir Litov (the referee), and seminar participants at American University, George Washington University, IMF Institute, Virginia Tech, 2006 Washington Area Finance Association Conference, and the 2007 Financial Management Association meeting for comments and suggestions that significantly improved the article. Ağca acknowledges a research grant from the J. Wendell and Louise Crain Research Fellowships program at George Washington University School of Business, and Mansi acknowledges receipt of partial funding from Virginia Tech's summer support. All remaining errors are the sole responsibility of the authors.


We examine the effect of agency conflicts on debt financing and show that managerial ownership and its interaction with takeover defenses affect these decisions. We find that (1) the relation between leverage and takeover defenses becomes insignificant when we control for the interaction of these defenses with managerial ownership, and (2) firms with large managerial ownership operate at high debt levels unless they have a large number of takeover defenses. Therefore, a two-dimensional aspect of governance that includes the interaction between managerial ownership and takeover defenses is useful in understanding the effect of agency conflicts on firms' debt financing decisions.