Corporate Governance and Financing Policy: New Evidence
New York University (NYU) - Department of Finance
Lubomir P. Litov
University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center
February 28, 2010
AFA 2006 Boston Meetings
CELS 2009 4th Annual Conference on Empirical Legal Studies Paper
Prior research has often taken the view that entrenched managers tend to avoid debt. Contrary to this view, we find that firms with entrenched managers, as measured by the Gompers et al. (2003) governance index, use more debt finance and have higher leverage ratios. To address the potential endogeneity of the governance index, we use instrumental variables analysis and the exogenous shock to corporate governance generated by the adoption of state anti-takeover laws. We find that firms incorporated in states that adopt restrictive anti-takeover laws increase the debt component of their external financing and have higher subsequent leverage. Our evidence is consistent with entrenched managers receiving better access to debt markets (better credit ratings) and better financing terms (perhaps in response to the conservative investment policy that they pursue).
Number of Pages in PDF File: 49
Keywords: Corporate Governance, Shareholder Rights, Managerial Risk-taking, Financing Policy, Capital Structure
JEL Classification: G31, G32, G34
Date posted: January 5, 2005 ; Last revised: March 12, 2010
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