Ownership Structure and the Cost of Corporate Borrowing

62 Pages Posted: 15 Dec 2009 Last revised: 23 Feb 2012

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Paul H. Malatesta

University of Washington - Michael G. Foster School of Business

Yuhai Xuan

University of California, Irvine - Paul Merage School of Business

Date Written: April 2, 2010

Abstract

This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996–2008 period, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner’s control rights and cash-flow rights and investigate factors that affect this relation. Our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by their excess control rights. These activities increase the monitoring costs and the credit risk faced by banks and, in turn, raise the cost of debt for the borrower.

Keywords: Ownership structure, Excess control rights, Control-ownership wedge, Cost of debt, Bank loans

JEL Classification: G21, G32, G34

Suggested Citation

Lin, Chen and Ma, Yue and Malatesta, Paul H. and Xuan, Yuhai, Ownership Structure and the Cost of Corporate Borrowing (April 2, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1522726 or http://dx.doi.org/10.2139/ssrn.1522726

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/yuema24

Paul H. Malatesta (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Yuhai Xuan

University of California, Irvine - Paul Merage School of Business ( email )

4291 Pereira Drive
Irvine, CA California 92697-3125
United States

HOME PAGE: http://yuhai.merage.uci.edu/

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