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Benefits of Control, Capital Structure and Company Growth

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  • Mueller, Elisabeth

Abstract

This paper studies the influence of the private benefits of control on the capital structure and the growth of private companies. It is argued that companies in which existing owners would lose more control if they expanded, have smaller equity increases, are more highly levered and grow more slowly. The dataset covers 8,964 private UK companies with limited liability for up to 5 years. Potential loss of control is measured as the difference in the probability of winning a vote for the largest owner before and after a hypothetical equity increase. Consistent with the private benefits of control, the results show that companies with a high potential loss of control do indeed have smaller equity increases, use more debt and grow more slowly. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 05-55.

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Date of creation: 2005
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Handle: RePEc:zbw:zewdip:4281

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Keywords: benefits of control; capital structure; company growth; small and medium-sized enterprises; entrepreneurship;

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References

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  1. Sanford J. Grossman & Oliver D. Hart, 1987. "One Share/One Vote and The Market for Corporate Control," Working papers 440, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Ron Anderson & Kjell G. Nyborg, 2001. "Financing and Corporate Growth under Repeated Moral Hazard," FMG Discussion Papers dp376, Financial Markets Group.
  3. Lucian Arye Bebchuk, 1999. "A Rent-Protection Theory of Corporate Ownership and Control," NBER Working Papers 7203, National Bureau of Economic Research, Inc.
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  5. Harris, Milton & Raviv, Artur, 1988. "Corporate governance : Voting rights and majority rules," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 203-235, January.
  6. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  7. Robert Cressy, 2002. "Introduction: Funding Gaps," Economic Journal, Royal Economic Society, vol. 112(477), pages F1-F16, February.
  8. Dyck, Alexander & Zingales, Luigi, 2002. "Private Benefits of Control: An International Comparison," CEPR Discussion Papers 3177, C.E.P.R. Discussion Papers.
  9. Mike Burkart & Denis Gromb & Fausto Panunzi, 1998. "Why Higher Takeover Premia Protect Minority Shareholders," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 172-204, February.
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  13. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  14. Lang, Larry & Ofek, Eli & Stulz, Rene M., 1996. "Leverage, investment, and firm growth," Journal of Financial Economics, Elsevier, vol. 40(1), pages 3-29, January.
  15. Colin Wren, 2002. "Evaluating the effect of soft business support upon small firm performance," Oxford Economic Papers, Oxford University Press, vol. 54(2), pages 334-365, April.
  16. Nenova, Tatiana, 2003. "The value of corporate voting rights and control: A cross-country analysis," Journal of Financial Economics, Elsevier, vol. 68(3), pages 325-351, June.
  17. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  18. Lease, Ronald C. & McConnell, John J. & Mikkelson, Wayne H., 1983. "The market value of control in publicly-traded corporations," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 439-471, April.
  19. Cressy, Robert & Olofsson, Christer, 1997. " The Financial Conditions for Swedish SMEs: Survey and Research Agenda," Small Business Economics, Springer, vol. 9(2), pages 179-94, April.
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Cited by:
  1. Nancy Huyghebaert & Linda Gucht & Cynthia Hulle, 2007. "The Choice between Bank Debt and Trace Credit in Business Start-ups," Small Business Economics, Springer, vol. 29(4), pages 435-452, December.
  2. Mueller, Elisabeth & Zimmermann, Volker, 2006. "The Importance of Equity Finance for R&D Activity: Are There Differences Between Young and OldCompanies?," ZEW Discussion Papers 06-14, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Cécile Carpentier & Jean-François L’Her & Jean-Marc Suret, 2012. "Seasoned equity offerings by small and medium-sized enterprises," Small Business Economics, Springer, vol. 38(4), pages 449-465, May.

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