Managerial Entrenchment and Capital Structure: The Effect of Diversification

61 Pages Posted: 8 Dec 2018

See all articles by Shuangshuang Ji

Shuangshuang Ji

University of North Carolina (UNC) at Charlotte, The Belk College of Business Administration, Finance, Students

David C. Mauer

University of North Carolina (UNC) at Charlotte

Yilei Zhang

University of North Carolina (UNC) at Charlotte

Date Written: December 8, 2018

Abstract

This paper empirically examines how diversification influences the relation between corporate governance and capital structure. Consistent with the creditor alignment hypothesis, we find a positive relation between managerial entrenchment and leverage in diversified firms. In contrast, we find a negative relation between managerial entrenchment and leverage in focused firms, which supports the managerial entrenchment hypothesis. These effects are stronger or only exist in samples with low excess values, which supports the agency channel through which governance influences leverage decisions. The results are robust to different measures of leverage, diversification, and governance, and continue to hold when we correct for selection bias and account for the joint endogeneity of leverage, diversification, and governance. Our evidence shows that the conflict in the literature on the relation between leverage and managerial entrenchments is because earlier empirical studies do not condition on the diversification status of firms. Entrenched managers in focused firms eschew leverage, whereas entrenched managers in diversified firms take advantage of their better access to debt finance and use more financial leverage.

Keywords: Diversification, Financial leverage, Managerial entrenchment, Corporate governance

JEL Classification: G32, G34

Suggested Citation

Ji, Shuangshuang and Mauer, David C. and Zhang, Yilei, Managerial Entrenchment and Capital Structure: The Effect of Diversification (December 8, 2018). Available at SSRN: https://ssrn.com/abstract=3297922 or http://dx.doi.org/10.2139/ssrn.3297922

Shuangshuang Ji

University of North Carolina (UNC) at Charlotte, The Belk College of Business Administration, Finance, Students ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

David C. Mauer (Contact Author)

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
704-687-7707 (Phone)

Yilei Zhang

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

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