Article ID Journal Published Year Pages File Type
967957 Journal of Multinational Financial Management 2012 20 Pages PDF
Abstract

Debt may help to manage type II corporate agency conflicts because it is easier for controlling shareholders to modify the leverage ratio than to modify their share of capital. A sample of 112 firms listed on the French stock market over the period 1998–2009 is empirically tested. It supports an inverted U-shape relationship between shareholders’ ownership and leverage. At low levels of ownership, controlling shareholders use more debt in order to inflate their stake in capital and to resist unfriendly takeovers attempts. When ownership reaches a certain point, controlling shareholders’ objectives further converge with those of outside shareholders. Moreover, financial distress will prompt controlling shareholders to reduce the firm's leverage ratio. Empirically, it is shown that the inflection point where the sign of the relationship between ownership and debt changes is around 40%. Debts may help in curbing private appropriation and appears also as a governance variable.

► An inverted U-shape relationship between controlling shareholders’ ownership and debt leverage is empirically evidenced. ► The inflection point where the sign of the relationship between ownership and debt changes is around 40%. ► Debt may help in curbing private appropriation and appears also as a governance variable.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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