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Ownership Structure and Debt Leverage: Empirical Test of a Trade-Off Hypothesis on French Firms

  • Hubert De La Bruslerie


    (DRM - Dauphine Recherches en Management - CNRS - Université Paris IX - Paris Dauphine)

  • Imen Latrous


    (Département de sciences économiques et administratives - Université du Québec à Chicoutimi - Département de sciences économiques et administratives)

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    Debt may help to manage type II corporate agency conflicts because it is easier for controlling shareholders to modify the leverage ratio than to modify their share of capital. A sample of 112 firms listed on the French stock market over the period 1998-2009 is empirically tested. It supports an inverted U-shape relationship between shareholders' ownership and leverage. At low levels of ownership, controlling shareholders use more debt in order to inflate their stake in capital and to resist unfriendly takeovers attempts. When ownership reaches a certain point, controlling shareholders' objectives further converge with those of outside shareholders. Moreover, financial distress will prompt controlling shareholders to reduce the firm's leverage ratio. Empirically, it is shown that the inflection point where the sign of the relationship between ownership and debt changes is around 40%. Debts may help in curbing private appropriation and appears also as a governance variable.

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    Paper provided by HAL in its series Post-Print with number halshs-00674250.

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    Date of creation: 2012
    Date of revision:
    Publication status: Published in Journal of Multinational Financial Management, Elsevier, 2012, 22 (4), pp.111-130
    Handle: RePEc:hal:journl:halshs-00674250
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