Download this Paper Open PDF in Browser

Corporate Governance and Financing Policy: New Evidence

49 Pages Posted: 5 Jan 2005 Last revised: 12 Mar 2010

Kose John

New York University (NYU) - Department of Finance

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: February 28, 2010

Abstract

Prior research has often taken the view that entrenched managers tend to avoid debt. Contrary to this view, we find that firms with entrenched managers, as measured by the Gompers et al. (2003) governance index, use more debt finance and have higher leverage ratios. To address the potential endogeneity of the governance index, we use instrumental variables analysis and the exogenous shock to corporate governance generated by the adoption of state anti-takeover laws. We find that firms incorporated in states that adopt restrictive anti-takeover laws increase the debt component of their external financing and have higher subsequent leverage. Our evidence is consistent with entrenched managers receiving better access to debt markets (better credit ratings) and better financing terms (perhaps in response to the conservative investment policy that they pursue).

Keywords: Corporate Governance, Shareholder Rights, Managerial Risk-taking, Financing Policy, Capital Structure

JEL Classification: G31, G32, G34

Suggested Citation

John, Kose and Litov, Lubomir P., Corporate Governance and Financing Policy: New Evidence (February 28, 2010). AFA 2006 Boston Meetings; CELS 2009 4th Annual Conference on Empirical Legal Studies Paper. Available at SSRN: https://ssrn.com/abstract=637341 or http://dx.doi.org/10.2139/ssrn.637341

Kose John (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Lubomir Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Paper statistics

Downloads
2,757
Rank
3,370
Abstract Views
8,112