Corporate Ownership Structure and the Choice Between Bank Debt and Public Debt
The Chinese University of Hong Kong (CUHK) - Department of Finance
(马跃) Yue Ma
City University of Hong Kong (CityUHK) - Department of Economics & Finance
Paul H. Malatesta
University of Washington - Michael G. Foster School of Business
Harvard Business School
October 15, 2012
Journal of Financial Economics (JFE), Forthcoming
This paper examines the relation between a borrowing firm's ownership structure and its choice of debt source using a novel, hand-collected data set on corporate ownership, control and debt structures for 9,831 firms in 20 countries from 2001 to 2010. We find that the divergence between control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant impact on the firm's choice between bank debt and public debt. A one-standard-deviation increase in the divergence reduces the borrowing firm's reliance on bank debt financing as measured by the ratio of bank debt to total debt by approximately 23% and increases its reliance on public debt financing as measured by the ratio of public debt to total debt by approximately 18%. The effect of the control-ownership divergence on borrowing firms' debt choice is more pronounced for firms with high financial distress risk, firms that are informationally opaque, and firms that are family-controlled. Moreover, this effect is weakened by the presence of multiple large owners and in countries with strong shareholder rights. Overall, our results are consistent with the hypothesis that firms controlled by large shareholders with excess control rights choose public debt financing over bank debt as a way of avoiding scrutiny and insulating themselves from bank monitoring.
Number of Pages in PDF File: 51Accepted Paper Series
Date posted: March 16, 2012 ; Last revised: May 22, 2013
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