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.
An Empirical Test of the Impact of Managerial Self-interest on Corporate Capital Structure
Article first published online: 30 APR 2012
1988 The American Finance Association
The Journal of Finance
Volume 43, Issue 2, pages 271–281, June 1988
How to Cite
FRIEND, I. and LANG, L. H. P. (1988), An Empirical Test of the Impact of Managerial Self-interest on Corporate Capital Structure. The Journal of Finance, 43: 271–281. doi: 10.1111/j.1540-6261.1988.tb03938.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
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.