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Managerial Preferences, Corporate Governance, and Financial Structure

Author

Listed:
  • Hong Liu

    (Olin School of Business,Washington University in Saint Louis)

  • Jianjun Miao

    () (Boston University, Department of Economics)

Abstract

Conflicts of interest between insiders (e.g, controlling shareholders) and outsiders (e.g., minority shareholders) are central to the analysis of modern corporation. In an integrated continuous-time contingent claims framework with imperfect corporate governance, we examine a controlling shareholder’s optimal choice of capital structure, ownership concentration, private benefit diversion, consumption, and financial market investment. We derive solutions in explicit parametric forms up to numerical integrations. In addition to generating implications consistent with existing empirical evidence, we also show that managerial preference characteristics (such as risk aversion and impatience), corporate governance, and financial market are important determinants of equity value, credit spread, agency costs, capital structure, and ownership concentration. Our model produces many novel empirically testable predictions. For example, it implies that a more risk averse or a less impatient entrepreneur issues less debt and more equity, and that stronger corporate governance leads to higher equity value, lower leverage, less ownership concentration, and lower credit spread. In addition, it also suggests that as the Sharpe ratio in the financial market increases, firm leverage ratio, agency costs, and credit spread all increase.

Suggested Citation

  • Hong Liu & Jianjun Miao, 2006. "Managerial Preferences, Corporate Governance, and Financial Structure," Boston University - Department of Economics - Working Papers Series WP2006-020, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2006-020
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    References listed on IDEAS

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    Cited by:

    1. de La Bruslerie, Hubert, 2016. "Does debt curb controlling shareholders' private benefits? Modelling in a contingent claim framework," Economic Modelling, Elsevier, vol. 58(C), pages 263-282.
    2. World Bank, 2009. "Good Governance in Public-Private Partnerships : A Resource Guide for Practitioners," World Bank Other Operational Studies 12665, The World Bank.

    More about this item

    Keywords

    Managerial/entrepreneurial characteristics; ownership and capital structure; private benefits of control; corporate governance;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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