Leverage,managerial monitoring and firm valuation: A simultaneous equation approach |
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| Institution: | 1. Campus Saint-Jean, University of Alberta 8406, Rue Marie-Anne-Gaboury (91 Street), Edmonton, AB T6C 4G9, Canada;2. Moore School of Business, University of South Carolina 1014 Greene Street, Columbia, SC 29208, USA;3. School of Business, Bryant University, 1150 Douglas Pike, Smithfield, RI 02917, USA;1. University of Birmingham Business School, Birmingham, UK;2. Richmond, The American International University in London, UK;3. University of Ghana Business School, Legon, Accra, Ghana;1. Kenan-Flagler Business School, The University of North Carolina, Chapel Hill, NC 27516-3490 United States;2. Leventhal School of Accounting, University of Southern California, Los Angeles, CA United States |
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| Abstract: | The paper examines how leverage and managerial ownership relate to firm valuation. It is argued that both leverage (which serves as an external monitoring function) and managerial ownership (which serves as an internal monitoring function) affect firm value, while internal monitoring by managers and external monitoring through debt were viewed as substitutes or complements. After controlling for the effect of exogenous variables, the results reveal the existence of a substitution monitoring effect between debt and the managerial group. Additionally, firm valuation is found to exert a significant influence on managerial ownership and vice versa. Robustness tests indicate a weak but growing role of bank debt as a disciplinary mechanism. |
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