The controlling shareholder's personal leverage and firm performance

Yehning Chen and Shing-Yang Hu

Applied Economics, 2007, vol. 39, issue 8, 1059-1075

Abstract: This article examines the relationship between firm performance and its controlling shareholder's personal loans. We present a model that allows the controlling shareholder to finance company projects through personal loans. Using personal loans, however, will create an incentive for controlling shareholders to pursue risky projects. We test our predictions using a sample of companies from Taiwan and find supporting evidence. We find that firms with a higher personal loan will have a higher risk and worse performance in the future. We also find that the positive relation between risk and personal leverage is time varying: the relation gets stronger in bad times.

Date: 2007
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DOI: 10.1080/00036840500462004

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