Do Agency relations Mediate the Interactions between Firms' Financial Policies and Business Cycles?
We investigate the interactions between firms’ financial policies and expected business cycles, in listed firms, in Europe, and over 20 years. We show that these interactions are mediated by ownership structures. Firms with strongly concentrated ownership, or under control, lead contra-cyclical policies, while firms with dispersed ownership lead somewhat pro-cyclical policies, supporting the traditional expectation that business cycles are of little direct relevance for financial policies. Our theoretical considerations unfold from the idea that ownership dispersion implies a different mix in agency relations in the firm. It entails specificities in agency costs, opportunity benefits of managerial discretion, it fosters differing needs for disciplining through debt, different needs for signaling, and potentially different market timing behaviors by managers and incumbent shareholders. As a result different objectives and constraints foster different policies: firms with dispersed ownership conduct lean (i.e. procyclical) policies, while firms with concentrated ownership or under control favor some financial smoothing (i.e. contra-cyclical policies). We derive from these two propositions specific hypotheses about public debt issuance, private debt management, investment, dividend and cash-holding policies, as well as resulting changes in financial leverage. Evidence is mostly supportive of our hypothesizing and propositions. Our proceedings are largely exploratory and our potential contribution extends to a number adjacent research questions including, among others, the analysis of performance effects of ownership concentration, the relative assessment of governance mechanisms, or still the investigation, in capital structure studies, of specific managerial behaviors and managerspecific information. Overall our emphasis on the potential relevance of business cycles for firm’s financial policies comes timely following the recent financial turmoil.
|Date of creation:||2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +352 46 66 44 6335
Fax: +352 46 66 44 6811
Web page: http://wwwen.uni.lu/luxembourg_school_of_financeEmail:
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:crf:wpaper:10-10. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martine Zenner)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.