The Controlling Shareholder's Personal Leverage and Firm Performance

39 Pages Posted: 13 Apr 2004

See all articles by Shing-yang Hu

Shing-yang Hu

National Taiwan University - Department of Finance

Yeh-Ning Chen

National Taiwan University - Department of Finance

Date Written: November 2003

Abstract

This paper examines the relationship between firm performance and its controlling shareholder's personal loans. We present a model that allows the controlling shareholder to finance company projects through personal loans. Using personal loans, however, will create an incentive for controlling shareholders to pursue risky projects. We test our predictions using a sample of companies from Taiwan and find supporting evidence. We find that firms with a higher personal loan will have a higher risk and worse performance in the future. We also find that the positive relation between risk and personal leverage is time varying: the relation gets stronger in bad times.

Keywords: Controlling shareholder, agency cost, asset substitution, risk, stock loan, leverage

JEL Classification: G32

Suggested Citation

Hu, Shing-yang and Chen, Yeh-Ning, The Controlling Shareholder's Personal Leverage and Firm Performance (November 2003). Available at SSRN: https://ssrn.com/abstract=529243 or http://dx.doi.org/10.2139/ssrn.529243

Shing-yang Hu (Contact Author)

National Taiwan University - Department of Finance ( email )

Room 715, School of Management
85, Sec. 4, Roosevelt Rd.
Taipei
Taiwan
+886 2 33661085 (Phone)
+886 2 23661299 (Fax)

Yeh-Ning Chen

National Taiwan University - Department of Finance ( email )

6F, 50, Lane 144, Keelung Road
Section 4
Taipei, Taiwan 106
China
886-2-363-6712 (Phone)
886-2-366-0764 (Fax)

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