Managerial entrenchment and capital structure: The effect of diversification

Shuangshuang Ji, David C. Mauer and Yilei Zhang

Journal of Corporate Finance, 2020, vol. 65, issue C

Abstract: This paper empirically examines how diversification influences the relation between corporate governance and capital structure. Consistent with the creditor alignment hypothesis, we find a positive relation between managerial entrenchment and leverage in diversified firms. In contrast, we find a negative relation between managerial entrenchment and leverage in focused firms, which supports the managerial entrenchment hypothesis. These effects are stronger or only exist in samples with low excess values, which supports the agency channel through which governance influences leverage decisions. Our results are robust to different measures of leverage, diversification, and governance, and continue to hold when we attempt to account for selection bias and the joint endogeneity of leverage, diversification, and governance.

Keywords: Diversification; Financial leverage; Corporate governance; Managerial entrenchment; Creditor alignment (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:65:y:2020:i:c:s0929119918300877

DOI: 10.1016/j.jcorpfin.2019.101505

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