Ownership structure and the cost of corporate borrowing

Abstract

This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996-2008 period, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner\u27s control rights and cash-flow rights and investigate factors that affect this relation. Our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by their excess control rights. These activities increase the monitoring costs and the credit risk faced by banks and, in turn, raise the cost of debt for the borrower

How Does Corporate Governance Affect Loan Collateral? Evidence from Chinese SOEs and Non‐SOEs

“…LagGuarantee , defined as the lagged guaranteed loan, is used as the instrument variable in equation ; and LagROA , defined as the lagged ROA , is used as the instrument variable in equation . The selection of these instrument variables is motivated by existing empirical studies (Linck et al ; Jackling and Johl ; Lin et al ). In the next section, where we conduct the regression analysis to examine the effects of corporate governance on the use of collateral, the simultaneous equation systems include the equations where the use of collateral and the relevant corporate governance variables are treated endogenously.…”

“…As noted by existing studies, these controlling shareholders hold significant control rights in excess of cash flow rights, and this divergence between control rights and cash flow rights induces moral hazards and adverse selection activities by controlling shareholders (Claessens et al, ). Controlling shareholders may use their powerful position to extract resources for their private benefit at the cost of other investors, while suffering limited consequences for such behavior, and this incentive to expropriate other investors becomes more severe when controlling shareholders' excess control rights become larger (Lin et al ). This severe expropriation will result in a higher probability of financial distress or bankruptcy, as well as associated costs, all of which are detrimental to creditors.…”

“…On the other hand, for non‐SOEs, the incentive of controlling shareholders to expropriate other investors may vary across different types of large owners (Lin et al ). Firstly, within the sample of our non‐SOEs, there are 4% (57) firm‐year observations that are widely held ownership firms.…”

Does Geographic Proximity Change the Passiveness of Equity Ownership by Bank Trust?

“…This explanation, however, does not seem to be sufficient as we find that the negative relation between local bank trust ownership and equity beta is (i) only driven by the increase of such ownership and (ii) only during crisis periods. Crises are hard to predict and represent a relatively exogenous shock (Lemmon and Lins ; Lin et al ). If a bank trust's impact on local firms’ risk‐taking could be fully attributed to its informational advantage, it should display the ability to predict lower future risk and select stocks accordingly both in and out of crisis periods.…”

The Effects of Ownership Structure on Corporate Financing Decisions: Evidence from Stock Market Liberalization

“…Chong () and Lin et al. () show that borrowing costs are much higher for firms with excess control rights.…”