Title

Ownership structure and the cost of corporate borrowing

Document Type

Journal article

Source Publication

Journal of Financial Economics

Publication Date

4-1-2011

Volume

100

Issue

1

First Page

1

Last Page

23

Keywords

Bank loans, Control-ownership wedge, Cost of debt, Excess control rights, Ownership structure

Abstract

This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996-2008 period, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner's control rights and cash-flow rights and investigate factors that affect this relation. Our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by their excess control rights. These activities increase the monitoring costs and the credit risk faced by banks and, in turn, raise the cost of debt for the borrower.

DOI

10.1016/j.jfineco.2010.10.012

Print ISSN

0304405X

Publisher Statement

Copyright © 2010 Elsevier B.V.

Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

Lin, C., Ma, Y., Malatesta, P., & Xuan, Y. (2011). Ownership structure and the cost of corporate borrowing. Journal of Financial Economics, 100(1), 1-23. doi: 10.1016/j.jfineco.2010.10.012