The Controlling Shareholder's Personal Leverage and Firm Performance
39 Pages Posted: 13 Apr 2004
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: Suggested Citation
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