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Journal of Financial Economics Vol. 100 No. 1 2011

Ownership structure and the cost of corporate borrowing

Chen-Ta Lin1; Yue Ma2; Paul Malatesta3; Yuhai Xuan4

1 Chinese University of Hong Kong · 2 Lingnan University, Tuen Mun, Hong Kong · 3 University of Washington · 4 Harvard Business School, Boston, MA, USA

open access

Abstract

This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996–2008 period, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner’s control rights and cash-flow rights and investigate factors that affect this relation. Our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by their excess control rights. These activities increase the monitoring costs and the credit risk faced by banks and, in turn, raise the cost of debt for the borrower.

DOI
10.1016/j.jfineco.2010.10.012
Volume
100
Issue
1
Pages
1-23
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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