The Impact of Owner’s Identity on Corporate Capital Structure

Abstract

This paper examines how the identity of corporate owners affects corporate leverage in the UK. Using data from a sample of 643 listed UK firms, the results show that family-controlled firms have higher debt ratios than companies controlled by financial institutions. The implication is that family-controlled companies prefer debt to equity in their capital structure due to either a control-enhancing mechanism and/or firm’s protection from take-over threats. The paper, further confirms that corporate control contestability has also a positive impact on debt ratio. In essence, a smaller value of control contestability signifies more equal distribution of the voting power between the two largest shareholders. This finding is in line with the monitoring hypothesis of the second largest shareholder, hence suggesting that the involvement of the second largest shareholder in monitoring the activities of the largest shareholder reduces the second-order agency costs, the agency conflict between minority and majority shareholders.