Ownership Structure and the Cost of Corporate Borrowing

By Chen Lin, Yueran Ma, Paul H. Malatesta, Yuhai Xuan. 2011

129 citations recorded by the source corpus.

This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996–2008 period, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner’s control rights and cash-flow rights and investigate factors that affect this relation. Our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by their excess control rights. These activities increase the monitoring costs and the credit risk faced by banks and, in turn, raise the cost of debt for the borrower.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/7dd927967c655f692b0bed2a684b8ab3223033a5

Citations in the corpus

• Large controlling shareholders and stock price synchronicity (2014, unknown): “…(Warfield et al., 1995), earnings informativeness (Fan and Wong, 2002), analyst following (Lang et al., 2004; Boubaker and Labégorre, 2008), accounting conservatism (Lafond and Roychowdhury, 2008), and the cost of corporate borrowing (Boubakri and Ghouma, 2010; Lin et al., 2011), among others.”
• Controlling shareholder, expropriations and firm's leverage decision: Evidence from Chinese Non-tradable share reform (2012, unknown): “Previous studies indicate that bank monitoring also plays an important role in controlling shareholders’ tunneling activities, especially in firms with high excess control rights (Lin et al., 2011b; Lin et al., 2012).”
• Directors׳ and officers׳ liability insurance and the cost of equity☆ (2016, unknown): “…on accounting restatements (Kim, 2006), reporting conservatism (Chung and Wynn, 2008), management forecasts (Wynn, 2008), investment decisions (Lin et al., 2011) and loan financing (Lin et al., 2013), we document how D&O insurance affects the…”
• Customer Concentration and Loan Contract Terms (2017, unknown): “Notably, following prior literature (e.g., Campello et al. (2011), Lin et al. (2011), and Hertzel and Officer (2012)), we do not repeatedly account for the same loans for the years after initiation.”
• Corporate Governance, Principal‐Principal Agency Conflicts, and Firm Value in European Listed Companies (2012, unknown): “In addition to considering whether a company has dual-class shares, we include a measure that captures the wedge between the cash flow rights and voting rights of the largest shareholder (CF Voting) (Lin et al., 2011).”
• Multiple large shareholders, excess leverage and tunneling: evidence from an emerging market (2017, unknown): “We focus on excess leverage because prior studies such as Paligorova and Xu, (2012), Lin et al. (2011) and Qian and Yeung (2015) note that the adoption of excess leverage policies provides a primary vehicle for controlling shareholders with excess control to divert resources from the firm for their…”
• Directors’ and Officers’ Liability Insurance and Acquisition Outcomes (2011, unknown): “Following the recent literature (Adams, Lin, and Zou, 2011; Lin, Ma, Malatesta, and Xuan, 2011), we use the industry average D&O insurance incidence and median coverage ratio as instruments for the firm’s D&O insurance incidence and coverage ratio, respectively.”
• Shareholder Litigation, Reputational Loss, and Bank Loan Contracting (2014, unknown): “Bank loans are combinations of price and nonprice attributes that are not necessarily separable (Melnik and Plaut (1986)).”
• Ownership Structure and Financial Constraints: Evidence from a Structural Estimation (2011, unknown): “…the classical yet growing literature on ownership and control (e.g., La Porta, Ló pez-de-Silanes, and Shleifer, 1999; Claessens, Djankov, and Lang, 2000; Gompers, Ishii, and Metrick, 2010; Lin, Ma, Malatesta, and Xuan, 2011) by linking insider excess control rights to external finance constraints.”
• The effect of government quality on corporate cash holdings (2014, unknown): “We consider this proxy appropriate in a setting such as China where the corporate ownership structure is concentrated (Lin et al., 2011).”