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Managerial entrenchment and capital structure: The effect of diversification

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  • Ji, Shuangshuang
  • Mauer, David C.
  • Zhang, Yilei

Abstract

This paper empirically examines how diversification influences the relation between corporate governance and capital structure. Consistent with the creditor alignment hypothesis, we find a positive relation between managerial entrenchment and leverage in diversified firms. In contrast, we find a negative relation between managerial entrenchment and leverage in focused firms, which supports the managerial entrenchment hypothesis. These effects are stronger or only exist in samples with low excess values, which supports the agency channel through which governance influences leverage decisions. Our results are robust to different measures of leverage, diversification, and governance, and continue to hold when we attempt to account for selection bias and the joint endogeneity of leverage, diversification, and governance.

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  • Ji, Shuangshuang & Mauer, David C. & Zhang, Yilei, 2020. "Managerial entrenchment and capital structure: The effect of diversification," Journal of Corporate Finance, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:corfin:v:65:y:2020:i:c:s0929119918300877
    DOI: 10.1016/j.jcorpfin.2019.101505
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    More about this item

    Keywords

    Diversification; Financial leverage; Corporate governance; Managerial entrenchment; Creditor alignment;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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