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Debt, Incentives and Performance: Evidence from UK Panel Data

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  • Roberta Dessí
  • Donald Robertson

Abstract

A large body of theoretical literature suggests that capital structure plays an important as a managerial incentive mechanism. Cross-sectional empirical studies have identified a positive effect of leverage on expected performance (measured by Q) for firms with low growth opportunities. This is consistent with the joint hypothesis that leverage is beneficial for low-growth firms (in line with Jensens free cash flow hypothesis), and that not all firms choose capital structure efficiently. However, this evidence does not take into account the endogeneity of capital structure decisions. We investigate how endogeneity affects the results using instrumental variables and allowing for dynamics. The results of earlier studies are then re-interpreted in the light of our findings.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp344.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp344.

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Date of creation: Feb 2000
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Handle: RePEc:fmg:fmgdps:dp344

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Web page: http://www.lse.ac.uk/fmg/

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Cited by:
  1. Calcagno, R. & Renneboog, L.D.R., 2004. "Capital Structure and Managerial Compensation: The Effects of Remuneration Seniority," Discussion Paper 2004-015, Tilburg University, Tilburg Law and Economic Center.
  2. Chen, Yenn-Ru & Lee, Bong Soo, 2010. "A dynamic analysis of executive stock options: Determinants and consequences," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 88-103, February.
  3. Aggarwal, Raj & Zhao, Xinlei, 2007. "The leverage-value relationship puzzle: An industry effects resolution," Journal of Economics and Business, Elsevier, vol. 59(4), pages 286-297.
  4. Eva Ropero Moriones, 2005. "Limited Liability In Business Groups," Business Economics Working Papers wb057617, Universidad Carlos III, Departamento de Economía de la Empresa.
  5. Alan Schwartz, . "A Normative Theory of Business Bankruptcy," American Law & Economics Association Annual Meetings 1037, American Law & Economics Association.

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