Does debt curb controlling shareholders' private benefits? Modelling in a contingent claim framework

Hubert de La Bruslerie

Economic Modelling, 2016, vol. 58, issue C, 263-282

Abstract: Debt is not frequently analyzed in relation to the conflict between controlling and outside shareholders. At the same time, debt leverage stands as a key variable in the design of a control contract as it has a strong disciplinary role. A simple option valuation model is used to show that debt is also a governance variable because it can moderate or enhance private benefits. It is argued that an asymmetrical self-regulation mechanism may develop in the case of control by a dominant shareholder. The joint questions of control, private benefits, and debt levels are linked within an inside corporate governance framework. At low levels of leverage, debt is relatively less disciplinary compared with a non-private benefits case. When leverage exceeds a threshold point, it becomes strongly disciplinary. We show that under given conditions, a self-regulation mechanism develops where the controlling shareholder is incentivized to hold less debt when he/she wants to increase his/her private appropriation rate.

Keywords: Private benefits; Controlling shareholders; Debt leverage; Corporate governance; Contingent claim; Option valuation model (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999316301651
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Does debt curb controlling shareholder's private benfits? Modelling in a contingent claim framework (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:58:y:2016:i:c:p:263-282

DOI: 10.1016/j.econmod.2016.06.002

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().