Blockholders, Debt Agency Costs and Legal Protection

51 Pages Posted: 22 Mar 2005 Last revised: 12 May 2014

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Levent Guntay

Federal Deposit Insurance Corporation (FDIC)

Ugur Lel

University of Georgia - Department of Banking and Finance

Date Written: March 10, 2009

Abstract

We investigate how investor protection influences the blockholder-bondholder conflict. We focus on family blockholders, the typical blockholders with high control motivations and the most common type of concentrated ownership, because blockholder-bondholders agency conflicts are clearest in this case. On one hand, family blockholders can mitigate debt costs through their undiversified investments, inter-generation presence, and firm survival concerns. On the other hand, they can exacerbate debt costs because of their unique power position to extract private benefits, leading to higher bankruptcy risk. The ultimate impact depends on how family blockholders are disciplined, specifically by the investor protection laws. Using international bond issues for 1,072 international firms from 23 countries we find that the presence of a family blockholder increases debt costs but the ultimate impact depends on investor protection: family firms in low investor protection countries suffer from higher debt costs compared to non-family firms, while family firms in high investor protection countries benefit from lower debt costs. Family's presence in management further increases debt costs but we find no effect from superior voting rights. We find no impact from institutional blockholdings and there is no evidence that they discipline family blockholders. The results show the importance of investor protection for debt agency conflicts.

Keywords: ownership structure, family firms, agency costs, corporate governance

JEL Classification: G30, G32, F30

Suggested Citation

Ellul, Andrew and Guntay, Levent and Lel, Ugur, Blockholders, Debt Agency Costs and Legal Protection (March 10, 2009). FRB International Finance Discussion Paper No. 908. Available at SSRN: https://ssrn.com/abstract=687371 or http://dx.doi.org/10.2139/ssrn.687371

Andrew Ellul (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Levent Guntay

Federal Deposit Insurance Corporation (FDIC) ( email )

550 17th Street NW
Washington, DC 20429
United States
202-8986819 (Phone)

Ugur Lel

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

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