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Does debt curb controlling shareholder's private benfits? Modelling in a contingent claim framework

Author

Listed:
  • Hubert de La Bruslerie

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

Debt is not frequently analyzed in relation to the conflict between controlling and outside shareholders. At the same time, debt leverage stands as a key variable in the design of a control contract as it has a strong disciplinary role. A simple option valuation model is used to show that debt is also a governance variable because it can moderate or enhance private benefits. It is argued that an asymmetrical self-regulation mechanism may develop in the case of control by a dominant shareholder. The joint questions of control, private benefits, and debt levels are linked within an inside corporate governance framework. At low levels of leverage, debt is relatively less disciplinary compared with a non-private benefits case. When leverage exceeds a threshold point, it becomes strongly disciplinary. We show that under given conditions, a self-regulation mechanism develops where the controlling shareholder is incentivized to hold less debt when he/she wants to increase his/her private appropriation rate.

Suggested Citation

  • Hubert de La Bruslerie, 2016. "Does debt curb controlling shareholder's private benfits? Modelling in a contingent claim framework," Post-Print hal-01945646, HAL.
    • Handle: RePEc:hal:journl:hal-01945646
    DOI: 10.1016/j.econmod.2016.06.002
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    Cited by:

    1. Hubert Bruslerie & Luminita Enache, 2023. "The dynamics of leverage of newly controlled target firms: evidence after an acquisition," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 411-445, August.
    2. Yarram, Subba Reddy & Rice, John, 2017. "Executive compensation among Australian mining and non-mining firms: Risk taking, long and short-term incentives," Economic Modelling, Elsevier, vol. 64(C), pages 211-220.
    3. Thanh, Su Dinh & Canh, Nguyen Phuc & Ha, Nguyen Tran Thai, 2020. "Debt structure and earnings management: A non-linear analysis from an emerging economy," Finance Research Letters, Elsevier, vol. 35(C).
    4. de La Bruslerie, Hubert & Gueguen, Simon, 2021. "Creditors’ holdup, releveraging and the setting of private appropriation in a control contract between shareholders," International Review of Law and Economics, Elsevier, vol. 68(C).

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