References
The notion that ownership structure significantly affects a firm’s performance has been widely studied
and is relatively conclusive. The relation between ownership structure and capital structure however
received less attention. Despite the fact that The agency relationship between management and
shareholders could affect capital-structure decision-making, since both parties can have considerable
equity ownership and influence on furn decision-making.
Since manager’s have considerable effect on capital structure decisions. Their behaviour must be
taken in account when examining capital structure variations. Managers’ adverse incentives may
influence corporate financing decision-making. In turn, the incentives for opportunistic behaviour by
managers could be influenced by equity ownership structure (Agrawal & Mandelker, 1990; Schleifer
and Vishny ,1986)
n addition, the distribution of managerial ownership in the UK is different
to that of the US
Berger, P. G., Ofek, E., & Yermack, D. L. (1997). Managerial entrenchment and capital structure
decisions. The journal of finance, 52(4), 1411-1438.
Brailsford, T. J., Oliver, B. R., & Pua, S. L. (2002). On the relation between ownership structure and
capital structure. Accounting & Finance, 42(1), 1-26.
Grossman, S. J., & Hart, O. D. (1982). Corporate financial structure and managerial incentives. In The
economics of information and uncertainty (pp. 107-140). University of Chicago Press.
Jensen, M. C., & Meckling, W. H. (1979). Theory of the firm: Managerial behavior, agency costs, and
ownership structure. In Economics social institutions (pp. 163-231). Springer, Dordrecht.
John, K., & Litov, L. (2010). Managerial entrenchment and capital structure: new evidence. Journal of
Empirical Legal Studies, 7(4), 693-742.
King, M. R., & Santor, E. (2008). Family values: Ownership structure, performance and capital
structure of Canadian firms. Journal of Banking & Finance, 32(11), 2423-2432.
Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal
of banking & finance, 34(3), 621-632.
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from
international data. The journal of Finance, 50(5), 1421-1460.
Short, H., Keasey, K., & Duxbury, D. (2002). Capital structure, management ownership and large
external shareholders: a UK analysis. International Journal of the economics of Business, 9(3), 375399.
Bits
Reviewing the influence of ownership structure on the corporate capital structure for as well
ownership concentration as the predominant ownership identities has not been done after the
2008 credit crisis. Since the effects of the 2008 recession where felt globally and many
changes had to be made in corporate finance in order to survive. Where changing corporate
finance strategies creates a suspicion of a change in the relationship between ownership
structure and the corporate financial structure, this research investigates if this relationship
has been altered and provides an updated view on the matter
(1) the cor- poration finance specialist concerned with the techniques of financing firms so as to ensure their survival and growth;
(2) the managerial economist concerned with capital budgeting; and (3) the economic theorist concerned with explaining
investment behavior at both the micro and macro levels.'
We contribute to this debate by revisiting the question of family ownership, firm
performance, and capital structure using a unique panel data set of 613 Canadian firms from
1998 to 2005. Canada provides an ideal setting for studying this question, as it features more
concentrated corporate ownership than the United States and more prevalent use of multiple
classes of voting shares and pyramidal structures (Attig 2005; Morck, Stangeland and Yeung
2000). While the ownership structure is quite different between Canada and the United States,
these two countrie
The purpose of this paper is to examine the relationship between debt, management ownership and large
external shareholders for a sample of UK quoted firms. Whilst a number of previous papers have
examined the effects of ownership on the capital structure of the firm (for example, Kim and Sorenson,
1986; Friend and Lang, 1988; Jensen et al., 1992; Bathala et al., 1994; Firth, 1995, Berger et al., 1997),
contradictory findings with respect to the relationship between debt and management ownership, and the
relationship between debt and large external shareholders have been reported. Moreover, with the
exception of Firth (1995), previous research has not investigated the interactions between debt,
management
1
ownership and external shareholders . In addition, all previous studies focus on US
firm data. This paper, therefore, extends the analysis of ownership and capital structure to UK firms and
furthermore, it explicitly considers the interactions between management ownership and large external
shareholders with respect to the capital structure of the firm.
Modern corporations are characterized by a separation of ownership and control (Berle & Means, 1932).
A range of literature has been done written on the effects of ownership and control on a company's
operations. This also includes research on the relationship between ownership and capital structure.
These studies studies have especially focused on the effects of managerial or external blockholder
ownership separately. We will discuss both in the following chapters
According to portfolio theory investors prefer a well-diversified portfolio to minimize their risk.
Corporate managers do not have the capacity to diversify their investment and thus minimize risk.
Their wealth is mostly derived from their non-diversifiable human capital which is invested in their
employer firm. Since this affects the wealth of managers, they may have the incentive to reduce this
employment risk by ensuring the viability of the company. One way to lower their non-diversifiable
employment risk is to decrease the company's debt-ratio. This will lower the chances that the firm
goes bankrupt which in turn will decrease the risk of unemployment for management. Thus ensuring
their employment and future earnings. The flipside is that managers therefore have the incentive to
decrease leverage to a point to it may be sub-optimal. Corporate governance mechanisms are in place
to discipline and control managers behaviour.
Thus, at low managerial ownership incentives alignment may lead to lower agency cost of debt which
results in higher leverage. However, managers become entrenched after a certain point, which increase
the incentives to lower debt-ratios to reduce their undiversifiable risk. Hence, the non-linear inverted Ushape with positive correlation at lower levels of ownership and a negative correlation at higher levels.
This shape was also found in their empirical study of Australian firms. The found critical point was at
the level of 49% managerial ownership.
Author(s)
Country
Latane and
Rendleman
(1976)
Chiras and
Manaster
(1987)
WISD, dividend
adjusted BlackScholes model.
Beckers
(1981)
WISD, at-the
money implied
volatility
Day and Lewis
(1992)
Time-series
behavior of at-themoney implied
volatility with
GARCH.
Stochastic volatility
option pricing
model (Hull and
White, 1987) with
GARCH volatility
estimates
Lamoureux
and Lastrapes
(1993)
Canina and
Figlewski
(1993)
Time-series
behavior of at-themoney implied
volatility
Period
WISD outperforms
historical volatility in
predicting realized
stock volatility
WISD superior in
predicting realized
stock volatility, 32%
of realized stock
volatility is
forecasted
Observation
s
Crosssectional
correlations
Managerial
ownership
Crosssectional
OLS
regressions
CBEO
individual
stock options
for the
period
06/197303/1975
62-115 CBEO
stock options
for the
period
04/197306/1977
All implied volatility
measures better in
forecasting crosssectional realized
stock volatility than
monthly historical
volatility. However
implied volatility is
biased and
informationally
inefficient
Implied volatility is
an informationally
inefficient predictor
of realized stock
volatility
Implied volatility is
an informative but
biased predictor.
Historical volatility
however contains
additional
information of
realized stock
volatility
Crosssectional
correlation
Implied volatility
from options with
different moneyness
and maturities show
nog significant
Time series,
OLS
regression
realized
stock
Time series,
OLS
regression
Time series,
OLS
regression
S&P 100
index
options
11/198312/1989
At-themoney CBOE
call options
based on 10
non-dividend
paying stocks
for period
04/198203/1984
S&P 100
index call
options for
period
relation with realized
stock volatility.
Historical volatility
superior in
forecasting realized
stock volatility
Implied volatility is
informationally
efficient and an
unbiased forecast of
realized volatility.
Implied volatility was
superior over
historical and GARCH
volatility
measurements.
volatility on
implied
volatility
03/198303/1987
Time series,
OLS
regression
realized
volatility on
implied
volatility
Foreign
currency
futures
options
traded on
the Chicago
Mercantile
Exchange
(CME) for
period
01/198502/1992
At-the
money
S&P 100
index call
option
from
11/1983 to
05/1995
35 futures
options
markets on
8 different
exchanges
Jorion (1995)
Forecasting power
of implied volatility
by futures option
prices.
Christensen
and Prabhala
(1998)
Investigating the
forecasting power
of implied volatility
of realized stock
volatility based on
non-overlapping
sampling
procedure
Implied volatility
implied by future
option prices
Implied volatility is
an efficient and
unbiased predictor
of realized stock
volatility
OLS
regression,
instrumenta
l variables
method
Implied volatility is
informationally
efficient in future
markets
OLS
regression,
GARCH
Christensen
and Hansen
(2002)
Research examines
the informational
efficiency of call
and put implied
volatility
separately
Shu and
Zhang (2003)
Study examines
the relationship
between implied
volatility and
realized stock
volatility with four
different measures
of realized
volatility
Call and put
volatilities both
efficient and
unbiased predictor
of realized stock
volatility. Call slightly
better predictor
The results conclude
that implied volatility
is an informationally
efficient but biased
predictor of realized
stock volatility
OLS
regression,
full
information
maximum
likelihood
(FIML)
OLS
regression,
instrumenta
l variables
method
Szakmary et al
(2003)
500 index
options
traded on
the CBEO
for the
period
01/199512/1999
Examining the relationship between ownership and capital structure can provide insights into capital
structure decision and contribute to the capital structure puzzle discussion
that at low levels of managerial ownership, external block holders have an active role in monitoring and
controlling management. This will result in less managerial opportunistic behaviour and thus lower
agency costs. In this situation, managerial and external block ownership will both positively affect
incentivizing managers. At low levels block ownership complements managerial ownership.
At high levels of managerial ownership,
To
Other theoretical and empirical studies suggest negative relationship between management ownership
and debt ratios. As management equity can also be considered as a disciplining measure which can align
management incentives with shareholder interest. It may substitute debt as a discipling mechanism. Thus
increasing management ownership, can reduce the need for debt as a disciplining measure. Furthermore,
at higher levels of ownership, managers are unable to diversify their portfolio due to their invested
human capital. Increasing the leverage may have negative effect on their employment and thus their
wealth. Managers may therefore choose to reduce firm risk by lowering leverage which again indicates
a negative relation between managerial ownership and leverage.
Agrawal, A., & Knoeber, C. R. (1996). Firm performance and mechanisms to control agency problems
between managers and shareholders. Journal of financial and quantitative analysis, 31(3), 377-397.
Agrawal, A., & Mandelker, G. N. (1987). Managerial incentives and corporate investment and financing
decisions. The journal of finance, 42(4), 823-837.
Agrawal, A., & Nagarajan, N. J. (1990). Corporate capital structure, agency costs, and ownership
control: The case of all‐equity firms. The Journal of Finance, 45(4), 1325-1331.
Balakrishnan, S., & Fox, I. (1993). Asset specificity, firm heterogeneity and capital structure. Strategic
Management Journal, 14(1), 3-16.
Bathala, C. T., Moon, K. P., & Rao, R. P. (1994). Managerial ownership, debt policy, and the impact of
institutional holdings: An agency perspective. Financial Management, 38-50.
Berger, P. G., Ofek, E., & Yermack, D. L. (1997). Managerial entrenchment and capital structure
decisions. The journal of finance, 52(4), 1411-1438.
Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. New Brunswick.
NJ: Transaction.
Brailsford, T. J., Oliver, B. R., & Pua, S. L. (2002). On the relation between ownership structure and
capital structure. Accounting & Finance, 42(1), 1-26.
Brealey, R., Leland, H. E., & Pyle, D. H. (1977). Informational asymmetries, financial structure, and
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DeAngelo, H., & Masulis, R. W. (1980). Optimal capital structure under corporate and personal
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Firth, M. (1995). The impact of institutional stockholders and managerial interests on the capital
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Friend, I., & Lang, L. H. (1988). An empirical test of the impact of managerial self‐interest on corporate
capital structure. the Journal of Finance, 43(2), 271-281.
Grossman, S. J., & Hart, O. D. (1982). Corporate financial structure and managerial incentives. In The
economics of information and uncertainty (pp. 107-140). University of Chicago Press.
Harris, M., & Raviv, A. (1988). Corporate control contests and capital structure. Journal of financial
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https://www.bloomberg.com/news/articles/2019-09-30/sanders-calls-for-taxes-on-exorbitantexecutive-compensation
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Kim, W. S., & Sorensen, E. H. (1986). Evidence on the impact of the agency costs of debt on corporate
debt policy. Journal of Financial and quantitative analysis, 21(2), 131-144.
King, M. R., & Santor, E. (2008). Family values: Ownership structure, performance and capital
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Mehran, H. (1992). Executive incentive plans, corporate control, and capital structure. Journal of
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Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of
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Moh'd, M. A., Perry, L. G., & Rimbey, J. N. (1998). The impact of ownership structure on corporate
debt policy: A time‐series cross‐sectional analysis. Financial Review, 33(3), 85-98.
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from
international data. The journal of Finance, 50(5), 1421-1460.
Shleifer, A., & Vishny, R. W. (1989). Management entrenchment: The case of manager-specific
investments. Journal of financial economics, 25(1), 123-139.
Short, H., Keasey, K., & Duxbury, D. (2002). Capital structure, management ownership and large
external shareholders: a UK analysis. International Journal of the economics of Business, 9(3), 375399.
Stulz, R. (1988). Managerial control of voting rights: Financing policies and the market for corporate
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