Theory and Evidence on the Relationship Between Ownership Structure and Capital Structure

Abstract

The agency relationship between managers and shareholders has the potential to influence decision-making in the firm which in turn potentially impacts on firm characteristics such as value and leverage. Prior evidence has demonstrated an association between ownership structure and firm value.This paper extends the literature by proposing a further link between ownership structure and capital structure. Using an agency framework we argue that the distribution of equity ownership among corporate managers and external blockholders has a significant relationship with leverage. The empirical results provide support for a positive relationship between external blockholders and leverage, and curvilinear relationship between the level of managerial share ownership and leverage. The results also suggest that the relationship between external block ownership and leverage varies across the level of managerial share ownership. These results parallel and are consistent with the 'active monitoring', 'convergence-of-interests' and the 'entrenchment' hypotheses.

Complementarities in Corporate Governance: Ownership Concentration, Capital Structure, Monitoring, and Pecuniary Incentives

“…Moreover, the theory provides a novel explanation for the empirical regularity that takeover transactions, which are designed to increase ownership concentration, are usually highly leveraged. More generally, 13 In a similar vein, Brailsford et al (1999) use Australian data to estimate the links between ownership concentration, managerial share, and ownership leverage. Like Meran (1992), they interprete leverage not as a governance instrument but as a sort of performance measure.…”

Relationship between Capital Structure and Ownership Structure: A Comparative Study of Textile and Non Textile Manufacturing Firms

“…Therefore, the results are mixed. The relationship between ownership structure and capital structure has been fairly researched in developed markets (Jensen, 1986;Changanti and Damanpour, 1991;Grier and Zychowicz, 1994;Brailsford et al, 2002;Miguel, A. et al, 2004;and Cespedes et al, 2010). These researchers found a significant relationship between capital structure and ownership structure.…”

Non-linear dynamic panel data analysis for debt-equity choice and its impact on moral hazard problems

“…This measurement was used by Brailsford, Oliver and Pua, 1999;Pandey, 2002;Rajan and Zingales, 1995. The reason for preferring this measurement is due to the Indonesian condition, in which as a developing country it often substitutes short-term debt for long-term debt and roll over short-term debt.…”

“…Profitability: Generally, previous studies measure profitability as operating income before interest and taxes divided by total assets (Brailsford et al, 1999;Rajan & Zingales, 1995;Titman & Wessels, 1988;Wald, 1999). Myers and Majluf (1984) predict that, as a result of asymmetric information, companies will prefer internal to external sources, whereby companies with high levels of profit tend to finance investment with retained earning rather than by the raising of debt finance.…”

“…Firm Size: Some previous studies employed natural log of total asset as a proxy of firm size due to the reason that total assets represent the real investment (Brailsford et al, 1999;Rajan & Zingales, 1995;Titman & Wessels, 1988;Wald, 1999). The Pecking order theory assumes that large firms can easily finance their investments directly from capital market, hence it can be argued that larger firms can have lower leverage (Smith & Warner, 1979;Drobetz & Fix, 2003).…”