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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.

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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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. SAU, Lino, 2007. "New Pecking Order Financing for Innovative Firms: an Overview," MPRA Paper 3659, University Library of Munich, Germany.
    5. Tijs Bie & Leo Haan, 2007. "Market Timing and Capital Structure: Evidence for Dutch Firms," De Economist, Springer, vol. 155(2), pages 183-206, June.
    6. de Jong, A., 2001. "The Disciplining Role of Leverage in Dutch Firms," Discussion Paper 2001-48, Tilburg University, Center for Economic Research.
    7. 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.
    8. repec:dgr:rugsom:01e54 is not listed on IDEAS
    9. Kayo, Eduardo K. & Kimura, Herbert, 2011. "Hierarchical determinants of capital structure," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 358-371, February.
    10. 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.
    11. 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.
    12. de Jong, A. & Dijk, R., 1998. "Determinants of Leverage and Agency problems," Discussion Paper 1998-82, Tilburg University, Center for Economic Research.
    13. 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.
    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 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.
    16. repec:dgr:uvatin:20020072 is not listed on IDEAS
    17. 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).

    More about this item

    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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