Ownership Structure and Debt Leverage: Empirical Test of a Trade-Off Hypothesis On French Firms

Bruslerie, Hubert de La; Latrous, Imen

doi:10.2139/ssrn.2084894

Cited by 6 publications

(7 citation statements)

References 15 publications

(5 reference statements)

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“…For instance, debt financing is assumed to decrease information asymmetry between managers and shareholders (Stulz, ) and to constrain managerial discretion by decreasing a firm's free cash flow (Jensen, ), opportunities for managerial empire building (Hart, ), underinvestment (Myers, ), and the risk‐shifting problem (Barnea, Haugen & Senbet, ). Ownership concentration is also considered to be a governance mechanism that minimizes manager–shareholder agency problems in countries other than the US and the UK (Kumar & Zattoni, ; La Porta, Lopez‐de‐Silanes, & Shleifer, ), a perspective corroborated, among others, by Sánchez‐Ballesta and García‐Meca () in Spain, Shuto and Kitagawa () in Japan, La Bruslerie and Latrous () in France, Alcock et al () in Australia, and Céspedes, González, and Molina () in Latin America. However, most of the research on the determinants of debt maturity has been conducted in Anglo‐Saxon countries.…”

Section: Introductionmentioning

confidence: 91%

Country‐level governance quality, ownership concentration, and debt maturity: A comparative study of Brazil and Chile

Martins

Schiehll

Terra

2017

Corporate Governance

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Manuscript type EmpiricalResearch Question/Issue This study investigates the interplay between country-level governance quality and the capital structure choice at the firm level in Brazil and Chile. We examine the association between a firm's ownership concentration and its debt maturity structure and whether country-level governance quality influences this association.Research Findings/Insights Using a large firm-level dataset from Brazil and Chile for the period 2008-2013, we find a positive association between low ownership concentration and debt maturity. However, this association becomes negative when the largest shareholder has high ownership concentration. This result suggests that long-term debt and ownership concentration act as substitute monitoring mechanisms. Moreover, debt maturity is inversely related to our aggregated index of country-level governance quality, suggesting that in countries with governance systems that effectively protect debt holders, firms with high benefits of control (high ownership concentration) will use debt with shorter repayment periods in order to benefit from frequent monitoring by debt holders. Overall, our results support the view that financial markets tend to pressure firms with high benefits of control or greater agency conflict to make a tradeoff between the benefits of control and the cost and maturity structure of debt financing.Theoretical/Academic Implications This study contributes to the research on comparative corporate governance and capital structure. We also respond to recent calls to bridge the gap between under-and over-socialized views of corporate governance by examining the interplay between firm-and country-level governance variables. Our findings suggest a substitution effect between monitoring by equity holders and by debt holders, and that country-level governance quality exerts a disciplinary influence over a firm's choice of debt maturity structure.Practitioner/Policy Implications Investors seeking to enter emerging markets such as Brazil and Chile can benefit from considering national governance factors that enhance debt holders' external monitoring effectiveness. Because our findings show the importance of considering and improving the quality of country-level governance, they are also useful for policy makers aiming to reform corporate governance practices in emerging markets.

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Section: Introductionmentioning

confidence: 91%

Country‐level governance quality, ownership concentration, and debt maturity: A comparative study of Brazil and Chile

Martins

Schiehll

Terra

2017

Corporate Governance

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“…However, when we remove the high LSS group restriction but keep the chief accountant in the nonlinear effect test, we find an insignificant nonlinear relationship between board independence and debt ratio. This again implies that the largest shareholders with a high level of shareholdings would influence the independent directors in debt financing (de La Bruslerie & Latrous, 2012). The outcomes in Table 7 remain the same, qualitatively, when we test the nonlinear effects of board independence and debt ratio in the group whose largest shareholders own more than 50% of the shares with a high BIND .…”

Section: Resultsmentioning

confidence: 99%

“…The divergence of control ownership affects debt maturity and security (Lin, Ma, Malatesta, & Xuan, 2013). Céspedes, González, and Molina (2010) and de La Bruslerie and Latrous (2012) show that the largest shareholders prefer to borrow debt financing over equity because they want to retain their control rights. Moreover, debt financing may help controlling shareholders adjust more easily than equity can.…”

Section: Hypothesis Developmentmentioning

confidence: 99%

Nonlinear impacts of board independence on debt financing: Contingent on the shareholdings of the largest shareholder

et al. 2020

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Shareholder interest is unprotected until and unless precise financial decision making is in place. Although literature supports the independent directors' monitoring function in a decision‐making process, for a controversial debt financing issue, the influence of the largest shareholders may hinder such an action. This study aims to delineate the association between board independence and debt financing when the largest shareholders are likely to play a significant role between them. With a sample of Vietnamese listed companies from 2007 to 2016, our regression analyses show that a nonlinear U‐shaped relationship between level of board independence and debt financing is stronger among the largest shareholders with a high level of shareholdings in their shareholding group than the full sample. This finding implies the determining influence of the largest shareholders with a high level of shareholdings in a company. However, this association is not found in companies with a low level of shareholdings by the largest shareholders. Results reveal that the largest shareholders have the incentive to influence the decision making of independent directors about debt financing when their shareholdings are high. Specifically, issuing more debt to raise capital for business reduces the risk of the largest shareholders losing their controlling rights. The results are further supported by several robustness checks and controlling for economic events such as the global financial crisis and ASEAN Economic Community.

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“…The first one relates to the governance of the firm. High indebtedness could lead to a loss of control to creditors and/or increase the risks of bankruptcy (Bruslerie and Latrous, ). As a result, high debt generates strong incentives for corporate insiders, controlling shareholders and managers alike, to confront employees in order to extract concessions for avoiding the occurrence of these two scenarios (Bronars and Deere, ).…”

Section: Theory and Propositions: A Qualitative Comparative Analysis mentioning

confidence: 99%

Necessary and sufficient factors in employee downsizing? A qualitative comparative analysis of lay‐offs in France and the UK, 2008–2013

Goyer¹,

Clark

Bhankaraully³

2016

Human Res Mgmt Journal

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Embedded in the literature on financialization and institutional approaches, this study is an examination of the causal factors of employee downsizing in two institutionally dissimilar settings, France and the UK, using the fuzzy sets variant of Qualitative Comparative Analysis. The findings show that the roughly equivalent use of large-scale lay-offs in the two countries is coupled with strikingly different causal factors. Our argument suggests the importance of complex causation whereby employee downsizing reflects the growing influence of financial considerations in the governance of companies, but its diffusion across countries is shaped by different configurations of institutional arrangements.

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Ownership Structure and Debt Leverage: Empirical Test of a Trade-Off Hypothesis On French Firms

Cited by 6 publications

References 15 publications

Country‐level governance quality, ownership concentration, and debt maturity: A comparative study of Brazil and Chile

Country‐level governance quality, ownership concentration, and debt maturity: A comparative study of Brazil and Chile

Nonlinear impacts of board independence on debt financing: Contingent on the shareholdings of the largest shareholder

Necessary and sufficient factors in employee downsizing? A qualitative comparative analysis of lay‐offs in France and the UK, 2008–2013

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