Ownership structure and the cost of corporate borrowing

Chen LIN, Yue MA, Paul MALATESTA, Yuhai XUAN

Research output: Journal PublicationsJournal Article (refereed)

180 Citations (Scopus)

Abstract

This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996-2008 period, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner's control rights and cash-flow rights and investigate factors that affect this relation. Our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by their excess control rights. These activities increase the monitoring costs and the credit risk faced by banks and, in turn, raise the cost of debt for the borrower.
Original languageEnglish
Pages (from-to)1-23
Number of pages23
JournalJournal of Financial Economics
Volume100
Issue number1
DOIs
Publication statusPublished - 1 Apr 2011

Fingerprint

Borrowing
Ownership structure
Costs
Control rights
Cost of debt
Debt financing
Moral hazard
Cash flow rights
Corporate ownership
Firm value
Owners
Divergence
Credit risk
Large shareholders
Monitoring costs
Ownership and control
Corporate control
Factors

Keywords

  • Bank loans
  • Control-ownership wedge
  • Cost of debt
  • Excess control rights
  • Ownership structure

Cite this

LIN, Chen ; MA, Yue ; MALATESTA, Paul ; XUAN, Yuhai. / Ownership structure and the cost of corporate borrowing. In: Journal of Financial Economics. 2011 ; Vol. 100, No. 1. pp. 1-23.
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Ownership structure and the cost of corporate borrowing. / LIN, Chen; MA, Yue; MALATESTA, Paul; XUAN, Yuhai.

In: Journal of Financial Economics, Vol. 100, No. 1, 01.04.2011, p. 1-23.

Research output: Journal PublicationsJournal Article (refereed)

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