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An Empirical Analysis of Incremental Capital Structure Decisions Under Managerial Entrenchment

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  • de Jong, A.

    (Tilburg University, Center For Economic Research)

  • Veld, C.H.

    (Tilburg University, Center For Economic Research)

Abstract

We study incremental capital structure decisions of Dutch companies. From 1977 to 1996 these companies have made 110 issues of public and private seasoned equity and 137 public issues of straight debt. Managers of Dutch companies are entrenched. For this reason a discrepancy exists between managerial decisions and shareholder reactions. Confirming Zwiebel (1996) we find that Dutch managers avoid the disciplining role of debt allowing them to overinvest. However, the market reactions show that this overinvestment behavior is recognized. Our findings also confirm the signalling model of Ross (1977) and the static trade-off model. We do not find a confirmation of the adverse selection model of Myers and Majluf (1984). This is probably due to the entrenchment of managers and the prevalence of rights issues.
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Suggested Citation

  • de Jong, A. & Veld, C.H., 1998. "An Empirical Analysis of Incremental Capital Structure Decisions Under Managerial Entrenchment," Discussion Paper 1998-83, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:fda95a61-68cd-4c97-a2f4-30729ec6bb2d
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    Cited by:

    1. Loncarski, I. & Ter Horst, J.R. & Veld, C.H., 2006. "Why do Companies issue Convertible Bond Loans? An Empirical Analysis for the Canadian Market," Discussion Paper 2006-65, Tilburg University, Center for Economic Research.
    2. Bernard Yeung & Randall Morck & Daniel Wolfenzon, 2004. "Corporate Governance, Economic Entrenchment and Growth," Working Papers 04-21, New York University, Leonard N. Stern School of Business, Department of Economics.
    3. Dutordoir, Marie & Li, Hui & Liu, Frank Hong & Verwijmeren, Patrick, 2016. "Convertible bond announcement effects: Why is Japan different?," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 76-92.
    4. Dutordoir, Marie & Van de Gucht, Linda, 2007. "Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2828-2846, September.
    5. Yongsik Kim, 2020. "Announcement Effects of Convertible and Warrant Bond Issues with Embedded Refixing Option: Evidence from Korea," Sustainability, MDPI, vol. 12(21), pages 1-21, October.
    6. de Jong, A., 2001. "The Disciplining Role of Leverage in Dutch Firms," Discussion Paper 2001-48, Tilburg University, Center for Economic Research.
    7. Kim, Hyeong Joon & Han, Seung Hun, 2019. "Convertible bond announcement returns, capital expenditures, and investment opportunities: Evidence from Korea," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 331-348.
    8. Isiker, Murat & Tas, Oktay, 2021. "Does leverage level matter for return anomaly during rights issue announcements? The case of Islamic countries," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 28, pages 141-155.
    9. de Jong, A., 2001. "The Disciplining Role of Leverage in Dutch Firms," Other publications TiSEM 940ddf9b-7e19-460c-be52-d, Tilburg University, School of Economics and Management.
    10. repec:dgr:rugsom:01e54 is not listed on IDEAS
    11. M. Dutordoir & L. Van De Gucht, 2004. "Are European Convertibles More Debt-Like than the US Issues? An Empirical Analysis," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 533-568.
    12. de Jong, A. & Dijk, R., 1998. "Determinants of Leverage and Agency problems," Discussion Paper 1998-82, Tilburg University, Center for Economic Research.
    13. Korteweg, A.G. & Renneboog, L.D.R., 2002. "The Choice between Rights-Preserving Issue Methods : Regulatory and Financial Aspects of Issuing Seasoned Equity in the UK," Discussion Paper 2002-93, Tilburg University, Center for Economic Research.
    14. Huang, Yu-Li & Shen, Chung-Hua, 2015. "Cross-country variations in capital structure adjustment—The role of credit ratings," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 277-294.
    15. de Haan, Leo & Hinloopen, Jeroen, 2003. "Preference hierarchies for internal finance, bank loans, bond, and share issues: evidence for Dutch firms," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 661-681, December.
    16. Kabir, Rezaul & Roosenboom, Peter, 2003. "Can the stock market anticipate future operating performance? Evidence from equity rights issues," Journal of Corporate Finance, Elsevier, vol. 9(1), pages 93-113, January.
    17. Chrisostomos Florackis & Aydin Ozkan, 2009. "The Impact of Managerial Entrenchment on Agency Costs: An Empirical Investigation Using UK Panel Data," European Financial Management, European Financial Management Association, vol. 15(3), pages 497-528, June.
    18. Chen, Linda H. & Jiang, George J., 2001. "The financing behavior of Dutch firms," Research Report 01E54, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    19. SAU, Lino, 2007. "New Pecking Order Financing for Innovative Firms: an Overview," MPRA Paper 3659, University Library of Munich, Germany.
    20. Tijs Bie & Leo Haan, 2007. "Market Timing and Capital Structure: Evidence for Dutch Firms," De Economist, Springer, vol. 155(2), pages 183-206, June.
    21. de Jong, A. & Dijk, R., 1998. "Determinants of Leverage and Agency problems," Other publications TiSEM b6da9b01-dd79-44fa-991e-c, Tilburg University, School of Economics and Management.
    22. Kayo, Eduardo K. & Kimura, Herbert, 2011. "Hierarchical determinants of capital structure," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 358-371, February.
    23. Holderness, Clifford G., 2018. "Equity issuances and agency costs: The telling story of shareholder approval around the world," Journal of Financial Economics, Elsevier, vol. 129(3), pages 415-439.
    24. Li, Hui & Liu, Hong & Siganos, Antonios, 2016. "A comparison of the stock market reactions of convertible bond offerings between financial and non-financial institutions: Do they differ?," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 356-366.
    25. de Jong, Abe & DeJong, Douglas V. & Mertens, Gerard & Wasley, Charles E., 2005. "The role of self-regulation in corporate governance: evidence and implications from The Netherlands," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 473-503, June.

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    Keywords

    capital structure; companies;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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