Ownership Structure, Financial Decisions, and Institutional Setting: An International Analysis through Simultaneous Equations

Abstract

We analyze the mutual relations among firms' capital structure, ownership structure, and valuation. Through the estimation of a system of simultaneous equations for a sample of 1,130 firms from 16 countries from both the common law and the civil law environments, our results confirm the differential effect of ownership structure on firms' value in each setting. Whereas in civil law firms the higher ownership concentration results in an entrenchment and an alignment effect, in the common law firms higher ownership concentration increases the value of the firm. Second, we corroborate the endogeneity of ownership structure since we find that ownership structure is affected by the value of the firm and by the capital structure. Third, our results suggest that corporate finance decisions are taken simultaneously with other mechanisms of corporate governance and conditional on firms' valuation.

Financial decisions and ownership structure as control mechanisms of agency problems: evidence from Italy

“…With regard to control variables, profitability, measured by ROA , is negatively associated with debt and cash and positively associated with dividends. The negative relationship between ROA and debt could be consistent with the thesis of Harris and Raviv (1991), Myers and Majluf (1984) and with the empirical findings by Rajan and Zingales (1995), López-Iturriaga and Rodríguez-Sanz (2012) and de Jong et al (2008). With regard to dividends, however, the positive and statistically significant coefficient on the ROA variable appears consistent with the analysis of López-Iturriaga and Santana-Martín (2015).…”

“…The results are also compatible with other studies that emphasize on the role of shareholder coalitions, be it as a means of monitoring agency costs or a means for extracting private benefits of control (Pagano and Roell, 1998; Bennedsen and Wolfenzon, 2000; Faccio et al , 2001; Bloch and Hege, 2003; Volpin, 2002; Maury and Pajuste, 2005; Boubaker, 2007; Jara-Bertin et al , 2008; Belot, 2010; Gutiérrez et al , 2012; Attig et al , 2013; Boubaker et al , 2016a, 2016b; Santos et al , 2015; López-Iturriaga and Santana-Martín, 2015). Again, the sign of the coefficients of the control variables seems to be consistent with the empirical evidence on DEBT , DIVIDEND and CASH HOLDING (Rozeff, 1982; Crutchley and Hansen, 1989; Jensen et al , 1992; Rajan and Zingales, 1995; Crutchley et al , 1999; Opler et al , 1999; Dittmar et al , 2003; Ozkan and Ozkan, 2004; de Jong et al , 2008; Berger and Udell, 1998; Paligorova and Xu, 2012; De Cesari, 2012; López-Iturriaga and Rodríguez-Sanz, 2012; Bigelli and Sánchez-Vidal, 2012; Santos et al , 2014; López-Iturriaga and Santana-Martín, 2015; Rossi and Cebula, 2016) 3 .…”

“…As in the empirical study of ownership structure, there might emerge serious endogeneity problems attributable to possible simultaneity (Demsetz and Lehn, 1985), in accordance with certain prior studies (De Miguel et al , 2005; Marchica, 2008; Faccio et al , 2010; Pindado and de la Torre, 2011; López-Iturriaga and Rodríguez-Sanz, 2012; Hernández-Cánovas et al , 2016; Santos et al , 2014), a dynamic panel data econometric model including two-step system-generalized method of moments (GMM) (Anderson and Hsiao, 1981; Arellano and Bond, 1991; Blundell and Bond, 1998) is estimated as it is a more powerful econometric tool that captures the two components of endogeneity attributable to the unobservable heterogeneity and the simultaneity of the variables (e.g. Wooldridge, 2002; Wintoki et al , 2012).…”

Debt and ownership structure: evidence from Italy

“…If the relationship is positive, and therefore complementary (Kim and Sorensen, 1986;Agrawal and Mandelker, 1987;Harris and Raviv, 1991), the two instruments may act simultaneously in reducing agency costs or the debt increase may be aimed at the expropriation of minority shareholders (Faccio et al, 2010;Paligorova and Xu, 2012;Boubaker et al, 2014). The positive (negative) sign of the relationship between debt and ownership structure does not necessarily entail a complementary monitoring (substitute monitoring) because the increased debt level and share ownership may result in both an actual monitoring of agency costs (Jensen, 1989;Agrawal and Knoeber, 1996;de Miguel et al, 2005;López-Iturriaga and Rodríguez-Sanz, 2012) and triggering a process of expropriation of minority shareholders because with the increase in debt, the firm has greater financial resources which the controlling shareholders may use improperly (Faccio et al, 2010;Boubaker et al, 2014;Pindado and de la Torre, 2011). Faccio et al (2010), in particular, argue that expropriation through debt occurs primarily in countries that have a high separation between ownership and control and low creditor protection; in these countries, the pyramidal group and debt often assume a complementary role, and these instruments are frequently used not to monitor agency costs but to expropriate minority shareholders.…”

Improvisation as Responsible Innovation in Organizations

“…We use size of the business, age of the business and performance as control variables. Usually, performance is used as the antecedent of EO, however, we control for it to filter out the alternative explanation of EO change, which is in line with the practice of controlling for firm performance [61]. As age of the business and size of the business were characterized by high skewness we decided to use natural logarithms of age (in years) and size (in number of employees).…”