An Empirical Test of the Impact of Managerial Self-Interest on Corporate Capital Structure




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    • Late Professor of Finance, University of Pennsylvania, and Assistant Professor of Finance, Michigan State University, respectively. The authors would like to acknowledge the helpful comments from Franklin Allen, Marshall Blume, Nick Gonedes, Joel Hasbrouck, Jeff Jaffe, Kose John, Rich Kihlstrom, Bob Litzenberger, Bob Vishny, the anonymous referee, and the participants of seminars at University of Pennsylvania, Michigan State University, University of Florida, University of Illinois, University of Alberta, University of Texas at Austin, University of Massachusetts, and Boston College. All remaining errors are the sole responsibility of the authors.


This paper provides a test of whether capital structure decisions are at least in part motivated by managerial self-interest. It is shown that the debt ratio is negatively related to management's shareholding, reflecting the greater nondiversifiable risk of debt to management than to public investors for maintaining a low debt ratio. Unless there is a nonmanagerial principal stockholder, no substantial increase of debt can be realized, which may suggest that the existence of large nonmanagerial stockholders might make the interests of managers and public investors coincide.