IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v39y2007i8p1059-1075.html
   My bibliography  Save this article

The controlling shareholder's personal leverage and firm performance

Author

Listed:
  • Yehning Chen
  • Shing-Yang Hu

Abstract

This article examines the relationship between firm performance and its controlling shareholder's personal loans. We present a model that allows the controlling shareholder to finance company projects through personal loans. Using personal loans, however, will create an incentive for controlling shareholders to pursue risky projects. We test our predictions using a sample of companies from Taiwan and find supporting evidence. We find that firms with a higher personal loan will have a higher risk and worse performance in the future. We also find that the positive relation between risk and personal leverage is time varying: the relation gets stronger in bad times.

Suggested Citation

  • Yehning Chen & Shing-Yang Hu, 2007. "The controlling shareholder's personal leverage and firm performance," Applied Economics, Taylor & Francis Journals, vol. 39(8), pages 1059-1075.
    • Handle: RePEc:taf:applec:v:39:y:2007:i:8:p:1059-1075
    DOI: 10.1080/00036840500462004
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840500462004
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/00036840500462004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    2. Stijn Claessens & Simeon Djankov & Joseph P. H. Fan & Larry H. P. Lang, 2002. "Disentangling the Incentive and Entrenchment Effects of Large Shareholdings," Journal of Finance, American Finance Association, vol. 57(6), pages 2741-2771, December.
    3. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    4. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
    5. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112.
    6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    7. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    8. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chan, Konan & Chen, Hung-Kun & Hu, Shing-yang & Liu, Yu-Jane, 2018. "Share pledges and margin call pressure," Journal of Corporate Finance, Elsevier, vol. 52(C), pages 96-117.
    2. Kao, Lanfeng & Chen, Anlin, 2013. "How product market competition affects dividend payments in a weak investor protection economy: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 21-39.
    3. Xiao, MingFang & Cao, June & Chiang, Yao-Min, 2022. "Kiss the baby for the nurse's sake? - Guaranteeing employees' stock purchase against loss program," International Review of Financial Analysis, Elsevier, vol. 81(C).
    4. Wang, Xiaoqiong & Zhen, Hongxian & Zhu, Feifei, 2023. "Voting with their feet: Controlling shareholders' share pledging and other major shareholders' strategic response," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    5. Yogesh Chauhan & Ajay Kumar Mishra & Ronald W. Spahr, 2021. "Stock pledging and firm risk: Evidence from India," Financial Management, Financial Management Association International, vol. 50(1), pages 261-280, March.
    6. Pei-Gi Shu & Sue-Jane Chiang & Man-Yin Chen, 2018. "A New Measure of Control-Cash Flow Deviation: Cases in Taiwan," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 25(4), pages 325-340, December.
    7. Zhou, Jingting & Li, Wanli & Yan, Ziqiao & Lyu, Huaili, 2021. "Controlling shareholder share pledging and stock price crash risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 77(C).
    8. Su-Lien Lu & Kuo-Jung Lee, 2021. "Investigating the Determinants of Credit Spread Using a Markov Regime-Switching Model: Evidence from Banks in Taiwan," Sustainability, MDPI, vol. 13(17), pages 1-25, August.
    9. Li, Wanli & Zhou, Jingting & Yan, Ziqiao & Zhang, He, 2020. "Controlling shareholder share pledging and firm cash dividends," Emerging Markets Review, Elsevier, vol. 42(C).
    10. Shah, Muhammad Hashim & Xiao, Zuoping & Abdullah, & Quresh, Shakir & Ahmad, Mushtaq, 2020. "Internal pyramid structure, contract enforcement, minority investor protection, and firms’ performance: Evidence from emerging economies," Research in International Business and Finance, Elsevier, vol. 52(C).
    11. Han, Han & Zhao, Xueqing & Wang, Zhibin, 2023. "The effect of stock pledge on corporate fraudulence: Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    12. He, Mingfeng & Huang, Dengshi & Zhou, Jianan, 2023. "The impacts of share pledging on firm investment timing and valuation," International Review of Financial Analysis, Elsevier, vol. 87(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Imen Derouiche & Majdi Hassan & Sarra Amdouni, 2018. "Ownership structure and investment-cash flow sensitivity," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(1), pages 31-54, March.
    2. Randall Morck, 2011. "Finance and Governance in Developing Economies," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 375-406, December.
    3. Zeineb Barka & Taher Hamza, 2020. "The effect of large controlling shareholders on equity prices in France: monitoring or entrenchment?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 24(3), pages 769-798, September.
    4. Boubaker, Sabri & Labégorre, Florence, 2008. "Ownership structure, corporate governance and analyst following: A study of French listed firms," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 961-976, June.
    5. Richardson, Grant & Wang, Bei & Zhang, Xinmin, 2016. "Ownership structure and corporate tax avoidance: Evidence from publicly listed private firms in China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(2), pages 141-158.
    6. Taylan Mavruk & Conny Overland & Stefan Sjögren, 2020. "Keeping it real or keeping it simple? Ownership concentration measures compared," European Financial Management, European Financial Management Association, vol. 26(4), pages 958-1005, September.
    7. Suveera Gill & Parmjit Kaur, 2015. "Family Involvement in Business and Financial Performance: A Panel Data Analysis," Vikalpa: The Journal for Decision Makers, , vol. 40(4), pages 395-420, December.
    8. Saghi-Zedek, Nadia & Tarazi, Amine, 2015. "Excess control rights, financial crisis and bank profitability and risk," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 361-379.
    9. Luc Laeven & Ross Levine, 2008. "Complex Ownership Structures and Corporate Valuations," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 579-604, April.
    10. Ricardo Leal & André Carvalhal-da-Silva, 2005. "Corporate Governance and Value in Brazil (and in Chile)," Research Department Publications 3208, Inter-American Development Bank, Research Department.
    11. Attiya Y. Javid & Robina Iqbal, 2010. "Corporate Governance in Pakistan: Corporate Valuation, Ownership and Financing," PIDE-Working Papers 2010:57, Pakistan Institute of Development Economics.
    12. Weiping Liu & Haibin Yang & Guangxi Zhang, 2012. "Does family business excel in firm performance? An institution-based view," Asia Pacific Journal of Management, Springer, vol. 29(4), pages 965-987, December.
    13. Saito, Takuji, 2008. "Family firms and firm performance: Evidence from Japan," Journal of the Japanese and International Economies, Elsevier, vol. 22(4), pages 620-646, December.
    14. Morck, Randall & Deniz Yavuz, M. & Yeung, Bernard, 2011. "Banking system control, capital allocation, and economy performance," Journal of Financial Economics, Elsevier, vol. 100(2), pages 264-283, May.
    15. San Martin-Reyna, J.M. & Duran-Encalada, Jorge A., 2012. "The relationship among family business, corporate governance and firm performance: Evidence from the Mexican stock exchange," Journal of Family Business Strategy, Elsevier, vol. 3(2), pages 106-117.
    16. Rossi, Fabrizio & Barth, James R. & Cebula, Richard J., 2018. "Do shareholder coalitions affect agency costs? Evidence from Italian-listed companies," Research in International Business and Finance, Elsevier, vol. 46(C), pages 181-200.
    17. Najah Attig & Sadok El Ghoul & Omrane Guedhami & Sorin Rizeanu, 2013. "The governance role of multiple large shareholders: evidence from the valuation of cash holdings," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 17(2), pages 419-451, May.
    18. Eklund, Johan & Desai, Sameeksha, 2008. "Ownership, Economic Entrenchment and Allocation of Capital," Working Paper Series in Economics and Institutions of Innovation 123, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    19. Irina Ivashkovskaya & Anastasia Stepanova, 2011. "Does strategic corporate performance depend on corporate financial architecture? Empirical study of European, Russian and other emerging market’s firms," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 15(4), pages 603-616, November.
    20. Nhung Hong LE, 2017. "The impact of family ownership status on determinants of leverage. Empirical evidence from South East Asia," Working Papers of LaRGE Research Center 2017-09, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:39:y:2007:i:8:p:1059-1075. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEC20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.