Disproportional Control Rights and the Bonding Role of Debt

52 Pages Posted: 4 Dec 2009

See all articles by Aiyesha Dey

Aiyesha Dey

Harvard Business School

Xue Wang

Ohio State University - Fisher College of Business

Valeri V. Nikolaev

University of Chicago Booth School of Business

Date Written: November 1, 2009

Abstract

We examine how firms’ capital structure choices vary with the presence of dual-class ownership and the degree of disproportional control associated with it. We document that, compared to a propensity-matched sample of single-class firms, dual-class firms have higher leverage, greater propensity to issue private debt, more long-term debt, and greater reliance on financial covenants. Within our dual-class sample, the use of debt financing increases with the degree of disproportional control via voting rights or board election rights. This evidence is consistent with controlling insiders bonding against the agency problems associated with dual-class ownership through their capital structure choices. Also consistent with this view, we document that leverage attenuates (and ultimately reverses) the adverse effect of dual-class status on Tobin’s q and cost of equity capital, and is associated with increased institutional investment in dual-class firms. Taken together, our evidence suggests that debt plays a governance role and disciplines insiders in dual-class firms.

Keywords: corporate governance, dual-class ownership, disproportional control, debt financing, capital structure, Tobin’s q

JEL Classification: G30, G38

Suggested Citation

Dey, Aiyesha and Wang, Xue and Nikolaev, Valeri V., Disproportional Control Rights and the Bonding Role of Debt (November 1, 2009). Available at SSRN: https://ssrn.com/abstract=1516351 or http://dx.doi.org/10.2139/ssrn.1516351

Aiyesha Dey

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Xue Wang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-1330 (Phone)
614-292-2118 (Fax)

Valeri V. Nikolaev (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

Register to save articles to
your library

Register

Paper statistics

Downloads
275
rank
108,206
Abstract Views
2,436
PlumX Metrics