Debt and Expropriation

35 Pages Posted: 29 Sep 2000

See all articles by Mara Faccio

Mara Faccio

Mitchell E. Daniels, Jr. School of Business, Purdue University; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Larry H.P. Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Leslie Young

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: July 1, 2003

Abstract

We regress leverage on an index of corporate exposure to expropriation by the controlling shareholder - the ratio of his ownership rights O to his control rights C - and on an index of creditor rights. Amongst corporations that can access related party loans, a lower O/C ratio increases leverage when creditor protection is weak; but reduces leverage where creditor protection is strong. In the first case, higher leverage gives the controlling shareholder control of more resources to expropriate. In the second case, minority shareholders and external lenders constrain the leverage of group affiliates that seemed more vulnerable to expropriation.

Note: Previously titled "Debt, Agency Costs and Institutions"

Keywords: Debt, corporate governance, business groups, expropriation

JEL Classification: G32, F23, F30

Suggested Citation

Faccio, Mara and Lang, Hsien Ping Larry and Young, Leslie S.F., Debt and Expropriation (July 1, 2003). Available at SSRN: https://ssrn.com/abstract=239724 or http://dx.doi.org/10.2139/ssrn.239724

Mara Faccio (Contact Author)

Mitchell E. Daniels, Jr. School of Business, Purdue University ( email )

403 W. State Street
West Lafayette, IN 47907-1310
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Hsien Ping Larry Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+85 2 2609 7761 (Phone)
+85 2 2603 6586 (Fax)

Leslie S.F. Young

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
852 2609 7421 (Phone)

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