In previous research, Friend and Hasbrouck theorized that managerial insiders (officers and directors) have a personal incentive to cause the firm to use less than the optimal amount of debt in its capital structure. They suggested this occurs because officers and directors have a large proportion of their personal wealth invested in the firm in the form of common stock holdings and firm‐specific human capital. This makes managerial insiders reluctant to use the optimal amount of debt financing for the firm because of the additional bankruptcy risk higher levels of debt engender. I test FH’s theory and find evidence that supports it. Specifically, the amount of debt in our sample firms’ capital structures declines as the percentage of the firm’s common stock held by the CEO and other officers and directors increases. A direct relationship is found between blockholder share ownership and our sample firms’ debt/equity ratio. This suggests that monitoring by blockholders is effective in controlling the suboptimal debt usage agency problem. Further, for any given level of blockholder share ownership, the greater the number of blockholders a firm has the less effective blockholders are in raising the amount of debt in the firm’s capital structure. Lastly, some weak evidence was found suggesting that a dual leadership structure was effective in increasing the amount of debt in a firm’s capital structure.

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<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">In this study, we found that NYSE and AMEX firms have somewhat different capital structures.<span style="mso-spacerun: yes;">&nbsp; </span>NYSE firms generally use 5% to 8% more debt financing in their capital structures than AMEX firms.<span style="mso-spacerun: yes;">&nbsp; </span>It was also found that the amount of debt in the capital structures of AMEX firms declined somewhat between 1985 and 2003 but remained relatively stable for NYSE firms.<span style="mso-spacerun: yes;">&nbsp; </span>Also, NYSE firms were found to exhibit a strong inverse relationship between firm profitability and the amount on debt in the firm&rsquo;s capital structure.<span style="mso-spacerun: yes;">&nbsp; </span>This result is generally consistent with Myers and Majluf&rsquo;s &ldquo;asymmetric information theory&rdquo; of capital structure.<span style="mso-spacerun: yes;">&nbsp; </span>No relationship was found between profitability and capital structure for AMEX firms.<span style="mso-spacerun: yes;">&nbsp; </span>Comparison of these results to similar calculations found in Fosberg and Ghosh (2005) for NASDAQ firms shows that, like AMEX firms, NASDAQ firms use less debt in their capital structures than NYSE firms and exhibit no relationship between profitability and capital structure.<span style="mso-spacerun: yes;">&nbsp; </span>Consequently, because these anomalies exist for both AMEX and NASDAQ firms, these two anomalies can not be an exchange listing effect.</span></span></p>