Ownership Structure and Debt Leverage: Empirical Test on French

39 Pages Posted: 1 Mar 2007 Last revised: 19 Jun 2015

See all articles by Hubert de La Bruslerie

Hubert de La Bruslerie

Université Paris Dauphine

Imen Latrous

Université du Québec à Chicoutimi (UQAC)

Date Written: February 28, 2007

Abstract

Debt is traditionally analyzed as disciplinary in the shareholders-manager conflict. It is less commonly analyzed in relation to controlling and outside shareholders. This paper shows that the joint problematics of ownership, private benefits and debt leverage are linked in a framework of financial governance. At the same time, debt helps to manage the conflict because it may be easier for the controlling shareholders to modify the leverage ratio than to modify his share of capital. A model shows that debt appears as a key governance variable as it can moderate private benefits or, conversely, may help diversion. The entrenchment effect and the fear for failure may explain the impact of debt. The existence of self-limited appropriation logics is highlighted as well as the importance of the information policy adopted by the controlling shareholders. In this paper, we test a possible non-linear relation between shareholders ownership and leverage. Using a sample of 118 French listed firms over the period 1998-2002, our results show that controlling shareholders ownership is linked with debt at different stage. At low levels of ownership, controlling shareholders use more debt in order to inflate their stake in capital and resist to unfriendly takeovers attempts. When ownership reaches a certain point, controlling shareholders' objectives converge further to those of outside shareholders. Moreover, the fear of financial distress will prompt controlling shareholders to reduce the firm's leverage ratio.

Keywords: private benefits, controlling shareholders, debt leverage, corporate governance

JEL Classification: G3, G32, G34

Suggested Citation

de La Bruslerie, Hubert and Latrous, Imen, Ownership Structure and Debt Leverage: Empirical Test on French (February 28, 2007). Paris December 2007 Finance International Meeting AFFI - EUROFIDAI Paper, Available at SSRN: https://ssrn.com/abstract=966120 or http://dx.doi.org/10.2139/ssrn.966120

Hubert De La Bruslerie (Contact Author)

Université Paris Dauphine ( email )

DRM Finance
Paris, 75116
France
(33) 1 44 05 44 05 (Phone)

Imen Latrous

Université du Québec à Chicoutimi (UQAC) ( email )

555 bd Université
Chicoutimi, G7H 2B1
Canada

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