The Effect of Managerial Ownership on the Cost of Debt

Abstract

This article examines the effect of managerial ownership (MO) on the cost of debt as measured by the interest rate spread on corporate bonds for Japanese firms. First, the authors find that the MO is positively associated with interest rate spread after controlling for the other Japanese ownership structure, cross-shareholdings, and the stable shareholdings by financial institutions. Second, by employing factor analysis to measure the agency cost of debt (ACD) based on financial variables, the authors also find that MO has higher correlation with interest rate spread when the ACD at the time of bond issue is already larger. The results are robust to additional analyses, including the possibility of nonlinear relationship, bond rating, endogeneity problem, and Fama and MacBeth approach. The results suggest that prospective bondholders use MO information to anticipate a firm's future ACD and estimate it higher when the current ACD at issuing bond is already larger. The results also suggest that accounting information is useful to estimate the ACD and increase the efficiency of bond contracting. Finally, although previous studies are often prone to emphasizing the findings on the Japanese unique ownership structure, the results of this article reveal that traditional agency theory on MO apply to Japanese bond market, which is consistent with the findings of U.S. firms.

Factors Affecting The Cost of Debt in Companies Listed within Kompas 100

“…The significance level that is smaller than α = 5% proves that the size of the company's significant influence negatively on the cost of debt received by the company. The results are consistent with research conducted by Bhojraj and Sengupta (2003), Chen and Jian (2006), Shuto and Kitagawa (2010), and Rebecca and Siregar (2011). The greater the total assets owned by the company, the greater the ability of the company to pay off its liabilities in the future so that the risk of company defaults will decline.…”

“…The significance level smaller than α = 5% proves that H20 and H2a are rejected or, in other words, the hypothesis test results indicate that managerial ownership has a significant positive effect on the cost of debt. This result is consistent with the result of the research by Agustiawan (2012) as well as Shuto and Kitagawa (2010). This could be due to, in addition to the conflict between shareholders to the manager, the conflict between creditors with managers, shareholders in the company, is one of the conflicts that could occur within the company.…”

“…In accordance with the above definition, institutional ownership is measured by the percentage of institutional ownership in the share structure of the company as previous studies (Bhojraj & Sengupta, 2003;Robert & Yuan, 2006;Piot and Missonier 2007;Juniarti & Sentosa, 2009;Collins & Huang 2010;and Shuto & Kitagawa, 2010). Formulated as…”

Cost of Debt and Corporate Profitability

“…2; debated in the research literature. The analysis of the cost of debt obviously becomes more complex when examining its relationship with various factors such as tax advantage (Miller, 1977;Graham, 2000;Green & Hollifield, 2003), auditor fees (Dhaliwal et al, 2008), corporate ownership structure (Aslan & Kumar, 2012), executive compensation (Kabir, Li, & Veld-Merkoulova, 2013), firm internationalization (Reeb, Mansi, & Allee, 2001), managerial ownership (Shuto & Kitagawa, 2011) and human capital (Berk, Stanton, & Zechner, 2010).…”

Stable Shareholdings, the Decision Horizon Problem and Earnings Smoothing

“…In Japan, there are stable shareholders that are highly concentrated among the corporate stockholders with financial institutions. In this case, firms are closely connected; they affect each other through cross-holdings of equity ownership, and generally depend on a large commercial bank (i.e., the main bank) for their primary banking needs (Hoshi et al, 1990(Hoshi et al, , 1991Aoki and Patrick, 1994;Douthett and Jung, 2001;Arikawa and Miyajima, 2007;Shuto and Kitagawa, 2011). 1 One of the important features about the stable shareholding arrangements made through cross-shareholdings and financial institutions is the implicit long-term contracts among them.…”