Shareholders' control rights, family ownership and the firm's leverage decisions

Abstract

We investigate the association between controlling shareholders' ownership (CS_Own) and firms' leverage decisions in the Singaporean context. We examine whether the impact of ownership concentration on leverage differs across excess and lower control. We report that shareholders with excess control prefer leverage financing for an optimal capital structure and focus on value maximisation rather using leverage as a tool of minority shareholders' expropriation. Our analysis shows that firms capital structure significantly influences by the coalition of shareholders particularly decisions about leverage financing in addition to the firms' specific characteristics and institutional arrangements. Our empirical evidence shows that controlling shareholders with a lower fraction of equity are more concerned about limited holding thus prefer leverage over equity financing to inflate their equity stake to protect them from the potential takeovers and mergers. We report that capital structure decisions in Singapore are linked with the trade-off between the controlling shareholders' target of mitigating firm risk and their non-dilution entrenchment needs. Further, we found an inverted U-shaped association between control ownership and leverage financing. In terms of moderating effect of family-controlled ownership, our findings exhibit that leverage financing is less pronounced for family firms in Singapore due to the under-diversified investment portfolio.

Voting stake of the largest shareholder, ownership concentration and leverage

“…While Lo et al. (2016) and Amin and Liu (2020) find that family control negatively moderates this positive relation for Taiwanese and Singaporean firms, respectively, Lean et al . (2015) have identified a positive moderating effect for firms in Malaysia.…”

“…(2019) find a negative association between the largest shareholder's ownership stake and leverage in their study of Chinese listed firms. Amin and Liu (2020) examine the association for 316 Singaporean firms from 2008 to 2016 and find a negative association between the aggregated voting stake of the largest ten shareholders and leverage. Consistent results are found by Lean et al .…”

“…Nevertheless, the precise manner in which ownership concentration impacts capital structure remains unclear, as previous studies only provide inconsistent results (e.g. Amin and Liu, 2020; Lean et al ., 2015; Céspedes et al. , 2010; Lo et al ., 2016; De la Bruslerie and Latrous, 2012).…”

“…, 2010; Lo et al ., 2016; De la Bruslerie and Latrous, 2012). Amin and Liu (2020) conducted a study on a sample of Singaporean firms, revealing a negative association between the aggregated voting stake of the largest ten shareholders and leverage. For Malaysian firms, Lean et al .…”

“…While the largest shareholder, holding the majority of voting rights, appears most influential in shaping capital structure decisions, previous studies have primarily used ownership instead of voting stake or some form of aggregated ownership of the largest shareholders as a proxy for ownership concentration (e.g. Brailsford et al, 2002;Amin and Liu, 2020;C espedes et al, 2010;Paramanantham et al, 2018). Our approach differentiates by focusing on the voting stake of the largest shareholder, who wields the most influence in corporate decisions.…”