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Managerial Entrenchment and Capital Structure: New Evidence

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  • Kose John
  • Lubomir Litov

Abstract

Prior research has often taken the view that entrenched managers tend to avoid debt. Contrary to this view, we find that firms with entrenched managers, as measured by the Gompers et al. (2003) governance index, use more debt finance and have higher leverage ratios. To address the potential endogeneity of the governance index, we use instrumental variables analysis and the exogenous shock to corporate governance generated by the adoption of state anti‐takeover laws. We find that firms incorporated in states that adopt restrictive anti‐takeover laws increase the debt component of their external financing. Our evidence is consistent with entrenched managers receiving better access to debt markets (better credit ratings) and better financing terms (perhaps in response to the conservative investment policy that they pursue).

Suggested Citation

  • Kose John & Lubomir Litov, 2010. "Managerial Entrenchment and Capital Structure: New Evidence," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 7(4), pages 693-742, December.
    • Handle: RePEc:wly:empleg:v:7:y:2010:i:4:p:693-742
    DOI: 10.1111/j.1740-1461.2010.01193.x
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    3. Richard Herron, 2022. "Payout policy and the interaction of firm-level and country-level governance," Review of Quantitative Finance and Accounting, Springer, vol. 58(1), pages 1-39, January.
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    5. Alves, Paulo & Couto, Eduardo & Francisco, Paulo, 2014. "Board of directors’ composition and financing choices," MPRA Paper 52973, University Library of Munich, Germany, revised 2014.
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    9. Trinh, Vu Quang & Kara, Alper & Elnahass, Marwa, 2022. "Dividend payout strategies and bank survival likelihood: A cross-country analysis," International Review of Financial Analysis, Elsevier, vol. 81(C).
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    11. Alves, Paulo & Couto, Eduardo Barbosa & Francisco, Paulo Morais, 2015. "Board of directors’ composition and capital structure," Research in International Business and Finance, Elsevier, vol. 35(C), pages 1-32.
    12. Sheikh, Shahbaz, 2018. "Is corporate social responsibility a value-increasing investment? Evidence from antitakeover provisions," Global Finance Journal, Elsevier, vol. 38(C), pages 1-12.
    13. John, Kose & Knyazeva, Anzhela & Knyazeva, Diana, 2015. "Governance and Payout Precommitment," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 101-117.
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    17. Hamdi Driss & Sadok El Ghoul & Omrane Guedhami & John K. Wald, 2023. "Governance and leverage: International evidence," The Financial Review, Eastern Finance Association, vol. 58(2), pages 261-285, May.

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