Corporate Governance, Debt, and Activist Institutions

60 Pages Posted: 17 Mar 2006

See all articles by Jayant R. Kale

Jayant R. Kale

Georgia State University

Burak Ciceksever

Independent

Harley E. Ryan

Georgia State University - Department of Finance

Date Written: April 19, 2006

Abstract

We analyze simultaneously the determinants of governance, debt, and activist institutional ownership as a system of three equations. We find that governance relates positively to activist institutional ownership, but has no relation with leverage. Leverage is negatively related to governance and activist institutional ownership, and activist institutional ownership relates positively to governance but negatively to leverage. These results suggest that managers of firms with higher governance levels choose lower levels of debt. Furthermore, although managers have discretion over capital structure, they seem to consider governance levels as predetermined. Leverage and activist institutional ownership appear to be substitute devices. Activist institutions positively influence governance, but invest in firms with strong governance, possibly because stronger governance allows them to be "activists". Finally, we also find that larger firms and firms subject to greater public scrutiny have higher levels of governance, which highlights the importance of the firm's environment in shaping corporate governance. Our analysis provides insights into how governance, leverage, and activist institutional ownership jointly form a system that monitors the firm.

Keywords: Governance, Agency problems, Leverage; Capital structure, Activist Institutions

JEL Classification: G32, G34, G38

Suggested Citation

Kale, Jayant Raghunath and Ciceksever, Burak and Ryan, Harley E., Corporate Governance, Debt, and Activist Institutions (April 19, 2006). Available at SSRN: https://ssrn.com/abstract=891410 or http://dx.doi.org/10.2139/ssrn.891410

Jayant Raghunath Kale

Georgia State University ( email )

Robinson College of Business
University Plaza
Atlanta, GA 30303-3083
United States
404-413-7345 (Phone)
404-413-7312 (Fax)

Burak Ciceksever

Independent ( email )

Harley E. Ryan (Contact Author)

Georgia State University - Department of Finance ( email )

University Plaza
35 Broad Street, Suite 1221
Atlanta, GA 30303-3083
United States
404-651-2674 (Phone)
404-651-2630 (Fax)

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