Get access

CAPITAL STRUCTURE, SHAREHOLDER RIGHTS, AND CORPORATE GOVERNANCE

Authors


  • The authors would like to acknowledge the helpful comments from William T. Moore (the former editor), Jacky So, Chip Wiggins, Lara Bryant, Ky Yuhn, and Pete DaDalt. In addition, the first author extends his thanks to the seminar participants at the University of Texas at Brownsville; New York Institute of Technology; Montclair State University; Adelphi University; the University of Maine, Orono; Indiana University, South Bend; and the University of South Carolina, Upstate. Part of this research was conducted as a result of a summer research grant at Texas A&M International University. The authors are responsible for any remaining errors.

Abstract

We show how capital structure is influenced by the strength of shareholder rights. Our empirical evidence shows an inverse relation 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 relation, 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.

Ancillary