TY - JOUR
T1 - Ownership structure and the cost of corporate borrowing
AU - Lin, Chen
AU - Ma, Yue
AU - Malatesta, Paul
AU - Xuan, Yuhai
PY - 2011/4
Y1 - 2011/4
N2 - 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. © 2010 Elsevier B.V.
AB - 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. © 2010 Elsevier B.V.
KW - Bank loans
KW - Control-ownership wedge
KW - Cost of debt
KW - Excess control rights
KW - Ownership structure
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U2 - 10.1016/j.jfineco.2010.10.012
DO - 10.1016/j.jfineco.2010.10.012
M3 - RGC 21 - Publication in refereed journal
SN - 0304-405X
VL - 100
SP - 1
EP - 23
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 1
ER -