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An empirical analysis of incremental capital structure decisions under managerial entrenchment

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Author Info
Jong, A. de
Veld, C. (Tilburg University, Center for Economic Research)

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Abstract

We study incremental capital structure decisions of Dutch companies. From 1977 to 1996 these companies have made 110 issues of public and private seasoned equity and 137 public issues of straight debt. Managers of Dutch companies are entrenched. For this reason a discrepancy exists between managerial decisions and shareholder reactions. Confirming Zwiebel (1996) we find that Dutch managers avoid the disciplining role of debt allowing them to overinvest. However, the market reactions show that this overinvestment behavior is recognized. Our findings also confirm the signalling model of Ross (1977) and the static trade-off model. We do not find a confirmation of the adverse selection model of Myers and Majluf (1984). This is probably due to the entrenchment of managers and the prevalence of rights issues.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 83.

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Date of creation: 1998
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Handle: RePEc:dgr:kubcen:199883

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G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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  1. Sau Lino, 2007. "New pecking order financing for innovative firms:an overview," Department of Economics Working Papers 200702, University of Turin. [Downloadable!]
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  2. Kabir, R. & Roosenboom, P., 2000. "Can the stock market anticipate future operating performance? : evidence from equity rights issues," Discussion Paper 22, Tilburg University, Center for Economic Research. [Downloadable!]
  3. Korteweg, A. & Renneboog, L.D.R., 2002. "The choice between rights-preserving issue methods : regulatory and financial aspects of issuing seasoned equity in the UK," Discussion Paper 93, Tilburg University, Center for Economic Research. [Downloadable!]
  4. Loncarski, Igor & Horst, Jenke ter & Veld, Chris, 2006. "Why do companies issue convertible bond loans? : an empirical analysis for the Canadian market," Discussion Paper 65, Tilburg University, Center for Economic Research. [Downloadable!]
  5. Leo de Haan & Jeroen Hinloopen, 2002. "Ordering the Preference Hierarchies for Internal Finance, Bank Loans, Bond and Share Issues," Tinbergen Institute Discussion Papers 02-072/2, Tinbergen Institute. [Downloadable!]
  6. Tijs de Bie & Leo de Haan, 2004. "Does market timing drive capital structures? A panel data study for Dutch firms," DNB Working Papers 016, Netherlands Central Bank, Research Department. [Downloadable!]
  7. L. de Haan & J. Hinloopen, 1999. "Debt or equity? An empirical study of security issues by Dutch companies," WO Research Memoranda (discontinued) 577, Netherlands Central Bank, Research Department. [Downloadable!]
  8. Kabir, Rezaul, 2003. "Corporate Financing in The Netherlands: Some Empirical Evidence," EIFC - Technology and Finance Working Papers 32, United Nations University, Institute for New Technologies. [Downloadable!]
  9. Jong, A. de, 2001. "The disciplining role of leverage in Dutch firms," Discussion Paper 48, Tilburg University, Center for Economic Research. [Downloadable!]
  10. Kabir, R. & Roosenboom, P.G.J., 2002. "Can the stock market anticipate future operating performance? Evidence from equity rights issues," Research Paper ERS-2002-102-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  11. Dutordoir, M. & Gucht, L. van de, 2006. "Are There Windows of Opportunity for Convertible Debt Issuance? Evidence for Western Europe," Research Paper ERS-2006-055-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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