The influence of growth opportunities on the relationship between equity ownership and leverage |
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| Authors: | Doocheol Moon Kishore Tandon |
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| Institution: | (1) School of Business, Yonsei University, 134 Shinchon-Dong, Seodaemoon-Ku, Seoul, 120-749, Korea;(2) Zicklin School of Business, Baruch College, City University of New York, Box B10-225, 55 Lexington Avenue, New York, NY 10010, USA |
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| Abstract: | This study investigates whether the association between ownership structure and leverage varies with the magnitude of growth
opportunities. According to the free cash flow hypothesis, managers receive utility from increasing firm size and the over-investment
problem is more severe for firms with fewer growth opportunities. Considering the disciplinary role of leverage on the over-investment
problem and ownership structure as a control mechanism to affect financing decisions, we hypothesize that the association
between ownership structure and leverage is stronger for firms with fewer growth opportunities. We find that the association
between equity ownership and leverage is significant for low-growth firms, but not for high-growth firms. The results mostly
hold when sample firms are partitioned into large and small firms to directly control for the effect of firm size on the association
between ownership structure and leverage.
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| Keywords: | Ownership structure Leverage Growth opportunities Free cash flow |
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