Corporate Governance, Debt, and Activist Institutions
60 Pages Posted: 17 Mar 2006
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Corporate Governance and Equity Prices
By Paul A. Gompers, Joy L. Ishii, ...
-
What Matters in Corporate Governance?
By Lucian A. Bebchuk, Alma Cohen, ...
-
Governance Mechanisms and Equity Prices
By Martijn Cremers and Vinay B. Nair
-
Did New Regulations Target the Relevant Corporate Governance Attributes?
By Reena Aggarwal and Rohan Williamson
-
Governance Mechanisms and Bond Prices
By Martijn Cremers, Vinay B. Nair, ...
-
Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and 1990s
-
Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and 1990s
-
The Costs of Entrenched Boards
By Lucian A. Bebchuk and Alma Cohen