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Abstract

Debt may help to manage type II corporate agency conflicts because it is easier for controlling shareholders to modify the leverage ratio than to modify their share of capital. A sample of 112 firms listed on the French stock market over the period 1998-2009 is empirically tested. It supports an inverted U-shape relationship between shareholders' ownership and leverage. At low levels of ownership, controlling shareholders use more debt in order to inflate their stake in capital and to resist unfriendly takeovers attempts. When ownership reaches a certain point, controlling shareholders' objectives further converge with those of outside shareholders. Moreover, financial distress will prompt controlling shareholders to reduce the firm's leverage ratio. Empirically, it is shown that the inflection point where the sign of the relationship between ownership and debt changes is around 40%. Debts may help in curbing private appropriation and appears also as a governance variable.

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File URL: http://halshs.archives-ouvertes.fr/docs/00/67/42/50/PDF/Hlb-latrous_empiric_new.pdf
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Paper provided by HAL in its series Post-Print with number halshs-00674250.

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Date of creation: 2012
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Publication status: Published, Journal of Multinational Financial Management, 2012, XX-XX
Handle: RePEc:hal:journl:halshs-00674250

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00674250
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Web page: http://hal.archives-ouvertes.fr/

Related research

Keywords: Corporate Governance; Private Benefits; Controlling Shareholders; Debt Leverage;

This paper has been announced in the following NEP Reports:

• NEP-ALL-2012-07-08 (All new papers)
• NEP-BEC-2012-07-08 (Business Economics)

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