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Control Motivations and Capital Structure Decision

61 Pages Posted: 22 Mar 2008  

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Date Written: January 2008

Abstract

This paper investigates the impact of corporate control motives on the firm's capital structure decision. Block holders with high control motivations face a trade-off between getting external finance and losing or diluting their control over the firm's decisions. Debt offers a solution to this dilemma while external equity does not. We hypothesize that firms with block holders that value control should have higher debt-equity ratios. Furthermore, we also hypothesize that debt is used more where control is valued most: in countries where minority shareholders rights are not well-protected and where losing control would cost the most. Risk-reduction motivations provide the competing hypothesis to control. In such a case, un-diversified block holders would want to decrease leverage to reduce firm specific risk in their un-diversified portfolios. We investigate the impact of family block holders because these are the best example of shareholders who, on one hand, value corporate control most and, on the other, have un-diversified portfolios. We use 3,608 firms from 36 different countries and find that, after controlling for all variables identified by the existing literature, control motives influence capital structure decisions significantly. Family firms have higher leverage relative to non-family firms and they have even higher leverage in countries where minority shareholders are least protected. Families are found to use leverage in a strategic way. They use it less when (a) they possess control-enhancing mechanisms, and (b) when their stake is high enough that can allow them to have control anyway.

Keywords: Ownership Structure, Corporate Control, Capital Structure, Family Firms, International Finance

JEL Classification: G30, G32, F30

Suggested Citation

Ellul, Andrew, Control Motivations and Capital Structure Decision (January 2008). Available at SSRN: https://ssrn.com/abstract=1094997 or http://dx.doi.org/10.2139/ssrn.1094997

Andrew Ellul (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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