Managerial Entrenchment and Capital Structure Decisions

Authors

  • PHILIP G. BERGER,

  • ELI OFEK,

  • DAVID L. YERMACK

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    • Berger is from the University of Pennsylvania, and Ofek and Yermack are from New York University. The authors appreciate helpful comments from René Stulz (the editor), two anonymous referees, and seminar participants from Boston College, Columbia University, New York University, University of Notre Dame, and the Financial Management Association. Berger acknowledges the financial support of Coopers & Lybrand.

ABSTRACT

We study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross-sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment-reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.

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