Ownership structure and the cost of corporate borrowing

Chen Lin, Yue Ma, Paul Malatesta, Yuhai Xuan

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)1-23
Number of pages23
JournalJournal of Financial Economics
Volume100
Issue number1
DOIs
StatePublished - Apr 1 2011

Fingerprint

Borrowing
Costs
Control rights
Ownership structure
Cost of debt
Factors
Large shareholders
Corporate control
Debt financing
Divergence
Firm value
Moral hazard
Corporate ownership
Owners
Credit risk
Ownership and control
Monitoring costs
Cash flow rights

Keywords

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

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

Ownership structure and the cost of corporate borrowing. / Lin, Chen; Ma, Yue; Malatesta, Paul; Xuan, Yuhai.

In: Journal of Financial Economics, Vol. 100, No. 1, 01.04.2011, p. 1-23.

Research output: Contribution to journalArticle

Lin, Chen ; Ma, Yue ; Malatesta, Paul ; Xuan, Yuhai. / Ownership structure and the cost of corporate borrowing. In: Journal of Financial Economics. 2011 ; Vol. 100, No. 1. pp. 1-23.
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