Managerial Entrenchment and Capital Structure Decisions

38 Pages Posted: 11 Nov 2008

See all articles by Philip G. Berger

Philip G. Berger

University of Chicago

Eli Ofek

New York University (NYU) - Department of Finance

David Yermack

New York University (NYU) - Stern School of Business

Date Written: December 1995

Abstract

We test the prediction that leverage is inversely associated with managerial entrenchment. We examine leverage levels and year-to-year changes for several hundred firms between 1984 and 1991. We find that leverage levels are positively related to CEO stock ownership and CEO stock option holdings, and negatively related to CEO tenure and board of directors size. While generally consistent with less entrenched CEOs pursuing more leverage, these results are subject to alternative interpretations. We therefore analyze year-to-year changes in leverage around exogenous shocks to corporate governance variables. We find that leverage increases after unsuccessful tender offers and â¬Sforcedâ¬? CEO replacements, and under certain conditions after the arrival of major stockholders. These relations have greater magnitude when the sample is restricted to low-leverage firms, even when 80% of firms are defined as low-leverage. The results are consistent with decreases in entrenchment leading to increases in leverage, and with the majority of firms having less debt than optimal.

Suggested Citation

Berger, Philip G. and Ofek, Eli and Yermack, David, Managerial Entrenchment and Capital Structure Decisions (December 1995). NYU Working Paper No. FIN-95-011, Available at SSRN: https://ssrn.com/abstract=1298318

Philip G. Berger (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Eli Ofek

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

David Yermack

New York University (NYU) - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY 10012-1126
United States
212-998-0357 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~dyermack

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