Corporate Ownership Structure and the Choice Between Bank Debt and Public Debt

51 Pages Posted: 16 Mar 2012 Last revised: 22 May 2013

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

(马跃) 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 Illinois at Urbana-Champaign - Department of Finance

Date Written: October 15, 2012

Abstract

This paper examines the relation between a borrowing firm's ownership structure and its choice of debt source using a novel, hand-collected data set on corporate ownership, control and debt structures for 9,831 firms in 20 countries from 2001 to 2010. We find that the divergence between control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant impact on the firm's choice between bank debt and public debt. A one-standard-deviation increase in the divergence reduces the borrowing firm's reliance on bank debt financing as measured by the ratio of bank debt to total debt by approximately 23% and increases its reliance on public debt financing as measured by the ratio of public debt to total debt by approximately 18%. The effect of the control-ownership divergence on borrowing firms' debt choice is more pronounced for firms with high financial distress risk, firms that are informationally opaque, and firms that are family-controlled. Moreover, this effect is weakened by the presence of multiple large owners and in countries with strong shareholder rights. Overall, our results are consistent with the hypothesis that firms controlled by large shareholders with excess control rights choose public debt financing over bank debt as a way of avoiding scrutiny and insulating themselves from bank monitoring.

Suggested Citation

Lin, Chen and Ma, (马跃) Yue and Malatesta, Paul H. and Xuan, Yuhai, Corporate Ownership Structure and the Choice Between Bank Debt and Public Debt (October 15, 2012). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2024308 or http://dx.doi.org/10.2139/ssrn.2024308

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 Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://www.business.illinois.edu/yhxuan/

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