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The Interaction of Capital Structure and Ownership Structure

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  • Jan Mahrt-Smith

    (University of Toronto)

Abstract

We develop a model of the interaction of firms' capital and ownership structures. The structures are designed to trade off managerial discipline versus managerial initiative. Debt features constrain managerial choice following poor firm performance. Equity ownership dispersion increases managerial initiative, by granting some managerial freedom following high firm performance. The empirical predictions are: equity ownership should be concentrated when debt is closely held, effective debt covenants are present, bankruptcy procedures and the institutional environment are creditor friendly, and board representation of lenders is commonplace. By contrast, equity should be dispersed if long-term investments are more important than short-term project selection.

Suggested Citation

  • Jan Mahrt-Smith, 2005. "The Interaction of Capital Structure and Ownership Structure," The Journal of Business, University of Chicago Press, vol. 78(3), pages 787-816, May.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:3:p:787-816
    DOI: 10.1086/429644
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    Citations

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    Cited by:

    1. Mahrt-Smith, Jan, 2006. "Should banks own equity stakes in their borrowers? A contractual solution to hold-up problems," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2911-2929, October.
    2. Lieven Baert & Rudi Vander Vennet, 2009. "Bank Ownership, Firm Value and Firm Capital Structure in Europe," Working Paper / FINESS 2.2, DIW Berlin, German Institute for Economic Research.
    3. de La Bruslerie, Hubert & Latrous, Imen, 2012. "Ownership structure and debt leverage: Empirical test of a trade-off hypothesis on French firms," Journal of Multinational Financial Management, Elsevier, vol. 22(4), pages 111-130.
    4. Margaritis, Dimitris & Psillaki, Maria, 2010. "Capital structure, equity ownership and firm performance," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 621-632, March.
    5. Dr. Kenyanya Patrick Nyatete, Ph.D. & Dr. Mule Robert Kisavi, Ph.D., 2020. "Moderating Effect of Business Size and Age on the Relationship between Financial Literacy and Financial Performance of Craft Micro Enterprises in Kisii County, Kenya," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 4(8), pages 819-823, August.
    6. Jou, Rosemary & Chen, Shi & Tsai, Jeng-Yan, 2017. "Politically connected lending, government capital injection, and bank performance," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 220-232.
    7. Edmans, Alex, 2011. "Short-term termination without deterring long-term investment: A theory of debt and buyouts," Journal of Financial Economics, Elsevier, vol. 102(1), pages 81-101, October.
    8. Sun, Ji & Ding, Li & Guo, Jie Michael & Li, Yichen, 2016. "Ownership, capital structure and financing decision: Evidence from the UK," The British Accounting Review, Elsevier, vol. 48(4), pages 448-463.
    9. Li, Bing & Li, Changhong & Wang, Li, 2019. "Does the shareholding network affect bank's risk-taking behavior? An exploratory study on Chinese commercial banks," Finance Research Letters, Elsevier, vol. 31(C).
    10. Guembel, Alexander & White, Lucy, 2014. "Good cop, bad cop: Complementarities between debt and equity in disciplining management," Journal of Financial Intermediation, Elsevier, vol. 23(4), pages 541-569.
    11. Nakabayashi, Masaki, 2019. "Ownership structure and market efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 61(C), pages 189-212.

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