Managerial Entrenchment and Capital Structure Decisions

Abstract

We study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross‐sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment‐reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.

Informational Asymmetry Between Managers and Investors in the Optimal Capital Structure Decision

“…a small board size, few outside directors, no major stock holders or weak voting powers of equity holders), 31 frictions 25 This is in line with empirical results obtained by Jung et al (1996) Berger et al (1997, Graham (2000) and de Jong & Veld (2001). 26 On the contrary, according to the 'control hypothesis' (e.g.…”

“…The different forms of mitigation are subsumed under the notion of 'managerial entrenchment', which -by following Berger et al (1997) -may be defined as: "the extent to which managers fail to experience discipline from the full range of corporate governance and control mechanism". 30…”

“…30 Berger et al (1997), p.1411 31 see e.g. Berger et al (1997), de Jong & Veld (2001 on the market for corporate control 32 (e.g.…”

“…e.g. Berger et al (1997), Graham is shown, that the endogenously determined bankruptcy thresholds for equity holders and managers diverge; being significantly lower for the management claim, which implies that if investors cannot closely monitor, the management may have an incentive, in the absence of any counteracting forces, to delay bankruptcy.…”

Complex Ownership and Capital Structure

“…There is a substantial literature examining the disciplinary role of debt in widely held firms (for example, Berger et al (1997), Lang et al (1991), Gul andTsui (1998), Maloney et al (1993)). 1 However, there are a few studies on the role of debt in pyramid firms where ultimate owners (controlling shareholders) have direct or indirect ownership in a large number of companies (Manos et al (2007) and Bianco and Nicodano (2006)).…”