Theory and Evidence on the Relationship between Ownership Structure and Capital Structure

34 Pages Posted: 30 Oct 1999

See all articles by Tim Brailsford

Tim Brailsford

Bond University

Barry R. Oliver

University of Queensland - Business School; Financial Research Network (FIRN)

Lay Hwa Sandra Pua

DHL International

Date Written: September 16, 1999

Abstract

Agency theory embeds the influential relationship that exist between managers and shareholders of firms. This relationship has the potential to influence decision-making in the firm which in turn has potential impacts on firm characteristics such as firm value. Prior evidence has demonstrated an association between ownership structure and firm value. This paper extends the literature by proposing a further link between ownership structure and capital structure. Using an agency framework we argue that the distribution of equity ownership among corporate managers and external blockholders has a significant relationship with leverage. The paper tests four hypotheses that explore various aspects of this relationship. The empirical results provide support for a positive relationship between external blockholders and leverage, a curvilinear relationship between the level of managerial share ownership and leverage and finally, the results suggest that the relationship between external block ownership and leverage varies across the level of managerial share ownership. These results parallel and are consistent with the "active monitoring hypothesis", "convergence-of-interests" and the "entrenchment" hypotheses which have been proposed in a different context.

JEL Classification: G32

Suggested Citation

Brailsford, Timothy John and Oliver, Barry Ross and Pua, Lay Hwa Sandra, Theory and Evidence on the Relationship between Ownership Structure and Capital Structure (September 16, 1999). Available at SSRN: https://ssrn.com/abstract=181888 or http://dx.doi.org/10.2139/ssrn.181888

Timothy John Brailsford

Bond University ( email )

Gold Coast, QLD 4229
Australia

HOME PAGE: http://www.bond.edu.au

Barry Ross Oliver (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Lay Hwa Sandra Pua

DHL International ( email )

29, Jalan Binchang
Singapore
32 2 713 4926 (Phone)

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