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Nonlinear association between controlling shareholders and leverage: evidence from Jordan

Author

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  • Buthiena Kharabsheh
  • Mishiel Said Suwaidan
  • Ramadan Elfaitouri

Abstract

This paper investigates the relationship between controlling shareholders' ownership, identity and financial leverage. A sample of 60 industrial firms listed on Amman Stock Exchange over the period of 2010 to 2015 is empirically tested. Using a dynamic estimator to control for all endogeneity types, our results support an inverted U-shape relationship between controlling shareholders and financial leverage. Controlling shareholders rely more on debt at low levels of ownership to maintain control. However, they rely less on debt, which is found in this study to be 53%, to avoid financial distress. These results provide support for the trade-off theory. Our findings also reveal that family firms have higher leverage ratios than non-family firms. Further, institutional shareholders negatively affect financial leverage, thus assuming a substitution role.

Suggested Citation

  • Buthiena Kharabsheh & Mishiel Said Suwaidan & Ramadan Elfaitouri, 2019. "Nonlinear association between controlling shareholders and leverage: evidence from Jordan," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 9(2), pages 193-212.
    • Handle: RePEc:ids:afasfa:v:9:y:2019:i:2:p:193-212
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