The Effect of Separating Ownership from Control on Corporate Leverage

Abstract

This paper aims to examine how corporate leverage is affected by the separation of ownership from control .Using data from a sample of 643 listed UK firms, the results show supportive evidence of a statistically significant positive relationship between the largest shareholder’s ownership concentration and debt ratio. More importantly, the results of the paper show a statistically significant and positive relationship between control-wedge (deviation between control rights and cash flow rights) and the debt ratio confirming that control attracts controlling shareholders to extract private benefits. This finding offers directly evidence for the debt-increasing effect of the hypothesis formulated in this paper: the non-dilution entrenchment effect and signaling effects of debt finance contribute to a higher corporate debt level when the control-rights and cash-flow rights of the largest controlling shareholder are highly separated.