Ownership Structure and Debt Leverage: Empirical Test of a Trade-Off Hypothesis On French Firms

41 Pages Posted: 5 Nov 2012

See all articles by Hubert de La Bruslerie

Hubert de La Bruslerie

Université Paris Dauphine

Imen Latrous

Université du Québec à Chicoutimi (UQAC)

Date Written: June 6, 2012

Abstract

Debt may help to manage type II corporate agency conflicts because it is easier for controlling shareholders to modify the leverage ratio than to modify their share of capital. A sample of 112 firms listed on the French stock market over the period 1998-2009 is empirically tested. It supports an inverted U-shape relationship between shareholders' ownership and leverage. At low levels of ownership, controlling shareholders use more debt in order to inflate their stake in capital and to resist unfriendly takeovers attempts. When ownership reaches a certain point, controlling shareholders' objectives further converge with those of outside shareholders. Moreover, financial distress will prompt controlling shareholders to reduce the firm's leverage ratio. Empirically, it is shown that the inflection point where the sign of the relationship between ownership and debt changes is around 40%. Debts may help in curbing private appropriation and appears also as a governance variable.

Keywords: Corporate Governance, Private Benefits, Controlling Shareholders, Debt Leverage

JEL Classification: G3, G32, G34

Suggested Citation

de La Bruslerie, Hubert and Latrous, Imen, Ownership Structure and Debt Leverage: Empirical Test of a Trade-Off Hypothesis On French Firms (June 6, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: https://ssrn.com/abstract=2084894 or http://dx.doi.org/10.2139/ssrn.2084894

Hubert De La Bruslerie (Contact Author)

Université Paris Dauphine ( email )

DRM Finance
Paris, 75116
France
(33) 1 44 05 44 05 (Phone)

Imen Latrous

Université du Québec à Chicoutimi (UQAC) ( email )

555 bd Université
Chicoutimi, G7H 2B1
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
212
Abstract Views
939
rank
143,864
PlumX Metrics