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 language | English |
|---|---|
| Pages (from-to) | 1-23 |
| Number of pages | 23 |
| Journal | Journal of Financial Economics |
| Volume | 100 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 1 Apr 2011 |
Bibliographical note
We are grateful for helpful comments and suggestions to Ben Esty, Stuart Gilson, Paul Gompers, Rafael La Porta, Yair Listokin, Bill Schwert, Andrei Shleifer, Laura Starks, Jeremy Stein, Belen Villalonga, Michael Weisbach, Scott Weisbenner, and participants at the National Bureau of Economic Research (NBER) Summer Institute 2010 Law and Economics Workshop and the 2010 Financial Management Association International (FMA) Asian Conference. We thank Arbitor Ma, Pennie Wong and William Alden for help with data collection.Funding
Xuan acknowledges financial support from the Division of Research of the Harvard Business School.
Keywords
- Bank loans
- Control-ownership wedge
- Cost of debt
- Excess control rights
- Ownership structure