Capital structure and outcome of proxy contest targets
Purpose - The purpose of this paper is to investigate the influence of capital structure changes by target firms on the outcome and Design/methodology/approach - The influence is examined by using predictions of control-driven model developed by Harris and Raviv and signaling theory of debt in capital structure. Findings - The results are consistent with the predictions of both control-driven model and signaling theory. Significant differences are found between two groups of target firms – management victory targets and dissident victory targets. Specifically: management victory targets feature proxy contests that are accompanied by leverage increasing changes in target firms' capital structure; the same group also realizes better long-run stock performance compared to dissident victory targets; and the long-run abnormal stock performance of management victory targets is significantly positively related to the increases in leverage in the capital structure during proxy contest period. Originality/value - This paper is the first to directly address the relationship between leverage change and the outcome and long-run performance of proxy contest targets, thus confirming both the defensive and the signaling role of debt on firm's capital structure decision.
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Volume (Year): 36 (2010)
Issue (Month): 4 (May)
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