Debt and Expropriation
35 Pages Posted: 29 Sep 2000
Date Written: July 1, 2003
We regress leverage on an index of corporate exposure to expropriation by the controlling shareholder - the ratio of his ownership rights O to his control rights C - and on an index of creditor rights. Amongst corporations that can access related party loans, a lower O/C ratio increases leverage when creditor protection is weak; but reduces leverage where creditor protection is strong. In the first case, higher leverage gives the controlling shareholder control of more resources to expropriate. In the second case, minority shareholders and external lenders constrain the leverage of group affiliates that seemed more vulnerable to expropriation.
Note: Previously titled "Debt, Agency Costs and Institutions"
Keywords: Debt, corporate governance, business groups, expropriation
JEL Classification: G32, F23, F30
Suggested Citation: Suggested Citation