Control Motivations And Capital Structure Decisions

Date Added: Sep 2009
Format: PDF

This paper investigates the use of leverage as one channel through which control-motivated blockholders can defend their corporate control. Such blockholders face a trade-off between raising external finance and losing their control over the firm. Debt offers a solution while equity does not because the former does not dilute the blockholder's voting power. The firms' ownership structure is used to detect control motivations of the largest blockholders. Family blockholders and long-term institutional blockholders are types of owners that value corporate control most. Using a sample of 5,975 firms from 38 countries over the period 1992-2006 and find that blockholders' control motives significantly influence the capital structure of the firms they invest in, leading to higher leverage.