Entrenched Management, Capital Structure Changes and Firm Value
Posted: 29 Jan 2008
Date Written: January 26, 2008
The relationship between managerial share ownership and the firm's change in leverage around a security issuance is examined. We find that entrenched managers are not more likely to issue equity, however they do affect lower leverage by choosing debt issuances which are smaller and equity issuances that are larger than those chosen by managers that are not entrenched. The magnitude of the decline in leverage that occurs from before the issuance to after the issuance is positively related to managerial share ownership. In addition, this relationship is confined to only the entrenchment range of managerial share ownership. The market reacts negatively to an issuance announcement when managerial share ownership is high.
Keywords: ownership structure, capital structure, security issue, agency theory
JEL Classification: G30, G32, G34
Suggested Citation: Suggested Citation