Capital Structure, Shareholder Rights, and Corporate Governance
23 Pages Posted: 13 Oct 2005
Date Written: August 2005
We show how capital structure is influenced by the strength of shareholder rights. The empirical evidence shows an inverse relationship between leverage and shareholder rights, suggesting that firms adopt higher debt ratios where shareholder rights are more restricted. This is consistent with agency theory, which predicts that leverage helps alleviate agency problems. This negative relationship, however, is not found in regulated firms (i.e., utilities). We contend that this is because regulation already helps alleviate agency conflicts, and hence, mitigates the role of leverage in controlling agency costs.
Keywords: capital structure, shareholder rights, corporate governance
JEL Classification: G30, G32, G34
Suggested Citation: Suggested Citation