Managerial Stock Ownership and the Maturity Structure of Corporate Debt

Abstract

This study documents that managerial stock ownership plays an important role in determining corporate debt maturity. Controlling for previously identified determinants of debt maturity and modeling leverage and debt maturity as jointly endogenous, we document a significant and robust inverse relation between managerial stock ownership and corporate debt maturity. We also show that managerial stock ownership inf luences the relation between credit quality and debt maturity and between growth opportunities and debt maturity.

Why are US firms using more short-term debt?

“…On the cross section, we find that firms with more managerial ownership, therefore where the interests between managers and shareholders are better aligned, hold less long-term debt. This result is consistent with the findings in Datta, Iskandar-Datta, and Raman (2005). However, we do not observe a difference in the evolution of debt maturity between the two groups.…”

“…The R&D coefficient is negative and significant, indicating that R&D-intensive firms use more short-term debt, which is consistent with the asymmetric information hypothesis. Although the term spread is not positive as expected, the sign of this variable is consistent with the previous findings by Barclay and Smith (1995) and Datta, Iskandar-Datta, and Raman (2005).…”

“…Datta, Iskandar-Datta, and Raman (2005) and Brockman, Martin, and Unlu (2009) find evidence that managerial compensation affects the choice of corporate debt maturity. Firms with higher managerial ownership tend to use more short-term debt.…”

“…Consistent with this agency hypothesis, Barclay and Smith (1995), Guedes and Opler (1996), and others find that debt maturity is negatively related to growth opportunities and positively related to firm size. Another view is that short-term debt is a mechanism to discipline managers reducing agency conflicts between managers and shareholders (Datta, Iskandar-Datta, and Raman (2005), and Brockman, Martin, and Unlu (2010)). …”

Simultaneous Effect on Debt and Managerial Ownership: Agency Theory Framework

“…Therefore, control of managerial ownership will restrict the use of debt companies. Research from Datta, et al (2005) also stated that manager has freedom to choice level of leverage that company used even the maturity of those debt. Based on this statement, if company use debt as financing source, it will isolate the manager from external monitoring.…”