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Capital structure and monitoring by local owners

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  • Taylan Mavruk
  • Stefan Sjögren

Abstract

We examine how owners’ portfolio diversification influences their firms’ financial decision-making and performance. We find that firms with high local ownership use less leverage, but firms with local ownership by locally biased owners use higher debt levels relative to firms with diversified local owners. Firms with high local ownership in urban regions use higher debt levels. In rural regions, firms with high locally biased ownership use higher debt levels relative to firms with diversified local ownership. Finally, although we find weak evidence that firms with high local ownership underperform the market, the underperformance is smaller in firms with high locally biased ownership. Thus, locally biased owners, not local owners with diversified portfolios, have an informed monitoring role in firms, and this effect seems to mitigate negative liquidity consequences. The separation of local owners into those with locally biased and those with diversified portfolios determines when and how local ownership can be used as a good proxy for informed investors.

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  • Taylan Mavruk & Stefan Sjögren, 2021. "Capital structure and monitoring by local owners," Applied Economics, Taylor & Francis Journals, vol. 53(40), pages 4614-4631, August.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:40:p:4614-4631
    DOI: 10.1080/00036846.2021.1904127
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    Cited by:

    1. Jana Heckenbergerova & Irena Honkova, 2023. "Capital Structure Analysis – Theories and Determinants Validation Based on Evidence from the Czech Republic," E&M Economics and Management, Technical University of Liberec, Faculty of Economics, vol. 26(1), pages 145-164, March.

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