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Managerial Entrenchment and Capital Structure: New Evidence
Author(s) -
John Kose,
Litov Lubomir
Publication year - 2010
Publication title -
journal of empirical legal studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.529
H-Index - 24
eISSN - 1740-1461
pISSN - 1740-1453
DOI - 10.1111/j.1740-1461.2010.01193.x
Subject(s) - leverage (statistics) , endogeneity , corporate governance , debt , capital structure , index (typography) , monetary economics , corporate finance , business , shock (circulatory) , economics , instrumental variable , financial system , finance , accounting , medicine , machine learning , world wide web , computer science , econometrics
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. 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).