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Managerial Entrenchment and Capital Structure: New Evidence

50 Pages Posted: 3 Jan 2011  

Kose John

New York University (NYU) - Department of Finance

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Abstract

Prior research has often taken the view that entrenched managers tend to avoid debt. Contrary to this view, we find that firms with entrenched managers, as measured by the Gompers et al. (2003) governance index, use more debt finance and have higher leverage ratios. To address the potential endogeneity of the governance index, we use instrumental variables analysis and the exogenous shock to corporate governance generated by the adoption of state anti-takeover laws. We find that firms incorporated in states that adopt restrictive anti-takeover laws increase the debt component of their external financing. Our evidence is consistent with entrenched managers receiving better access to debt markets (better credit ratings) and better financing terms (perhaps in response to the conservative investment policy that they pursue).

Suggested Citation

John, Kose and Litov, Lubomir P., Managerial Entrenchment and Capital Structure: New Evidence. Journal of Empirical Legal Studies, Vol. 7, No. 4, pp. 693-742, 2010. Available at SSRN: https://ssrn.com/abstract=1733788 or http://dx.doi.org/10.1111/j.1740-1461.2010.01193.x

Kose John (Contact Author)

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

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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