Outside Blockholders’ Monitoring of Management and Debt Financing

50 Pages Posted: 25 Nov 2009 Last revised: 18 Oct 2012

See all articles by Scott Liao

Scott Liao

University of Toronto - Rotman School of Management

Date Written: August 11, 2011

Abstract

This study examines how outside large shareholders’ monitoring of management, and its interaction with accounting quality, affect firms’ debt financing choices, i.e., the choice between public debt and bank loan. Consistent with the notion that banks have a superior ability to monitor the firm and reduce agency costs of debt caused by blockholders’ monitoring of management, I find that firms with higher outside blockholdings are more inclined to use bank loans relative to public debt when they decide to enter the debt markets. Corroborating this finding, I document that firms with higher outside blockholdings are more likely to include various debt covenants in their bank loans to mitigate the agency conflicts caused by outside blockholders, and that banks charge lower interest spreads than public debtholders in response to increased agency risk. Finally, I find that these relations between blockholdings and debt financing are strengthened when the firm has better accounting quality, suggesting that accounting facilitates blockholders’ monitoring to the detriment of lenders. This study contributes to the corporate governance literature by incorporating lenders’ differential monitoring roles and accounting information in the overall corporate governance system.

JEL Classification: M41, C93

Suggested Citation

Liao, Wei-Yi (Scott), Outside Blockholders’ Monitoring of Management and Debt Financing (August 11, 2011). Available at SSRN: https://ssrn.com/abstract=1512706 or http://dx.doi.org/10.2139/ssrn.1512706

Wei-Yi (Scott) Liao (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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