The idea that the general characteristics of a firm’s ownership structure can affect performance has achieved considerable attention and related research brought forward relatively consistent empirical evidence e.g. on the positive impact of managerial ownership on firm performance. However, the evidence on the relation between ownership and capital structure is less consistent and numerous, although there are good reasons to believe that there may be such a relationship.
Since the capital structure irrelevance propositions of MODIGLIANI/MILLER economists have devoted considerable time to studying cross-sectional and time-series variations in capital structure. More recent work following the seminal contribution by JENSEN/MECKLING has employed an agency theory perspective in the search for an explanation of capital structure variations. With this managerial perspective capital structure is not only explained by variations in internal and external contextual factors of the firm, but also by the values, goals, preferences and desires of managers. Corporate financing decisions are influenced by managers’ incentives and the incentives for managers to act opportunistically can be influenced by the ownership structure of the firm.
However, most empirical work analyzing a firm’s capital structure in cross-sectional and time-series studies ignores the equity ownership structure as a possible explanatory variable. This can be partly explained by problems associated with the availability of ownership data, when compared to readily available accounting and market data on other relevant variables. Notwithstanding, it entails a problem of model misspecification as omitting a relevant variable may cause misleading empirical conclusions. Additionally, the problem arises that the studies taking ownership structure into account do not bring forward consistent results. They find contradictory evidence without any side clearly dominating the discussion, neither theoretically nor empirically.
The objective of this thesis is to contribute to the empirical debate of those two problems by investigating whether the structure of equity ownership can help in explaining cross-sectional variation in capital structure for the case of Germany. Since corporate managers and external block holders are two groups who have considerable influence on a firm’s decisions, this thesis focuses on the effects of managerial share ownership and external block ownership on capital structure.
Table of Contents
1 INTRODUCTION
1.1 Problem and Objective of the Thesis
1.2 Organization of the Thesis
2 THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE, MANAGEMENT OWNERSHIP AND EXTERNAL BLOCK HOLDERS – PRIOR RESEARCH AND HYPOTHESES
2.1 Capital Structure and Management Ownership
2.1.1 Incentive-Alignment Hypothesis
2.1.2 Signaling and Corporate Control Considerations
2.1.3 Management Entrenchment Hypothesis
2.1.4 Non-Linearity and Hypothesis Development
2.2 Capital Structure and External Block Holders
2.3 Interaction of Management Ownership and External Block Holders
3 ECONOMETRIC ANALYSIS OF OWNERSHIP AND CAPITAL STRUCTURE
3.1 Data and Model Specification
3.1.1 Sample Selection
3.1.2 Ownership Structure Variables
3.1.3 Measures of Capital Structure and Univariate Analysis
3.1.4 Additional Capital Structure Determinants
3.1.5 Variable Overview and Correlation Analysis
3.1.6 Multivariate Regression Models
3.2 Empirical Results and Theoretical Implications
3.2.1 Capital Structure and Management Ownership
3.2.2 Capital Structure and External Block Holders
3.2.3 Interaction of Management Ownership and External Block Holders
3.3 Robustness of Results
3.3.1 Multicollinearity, Heteroskedasticity and Non-Normality
3.3.2 Alternative Variable Definitions
3.3.3 Exclusion of Observations
4 CONCLUSION
4.1 Summary and Critique
4.2 Implications for Further Research
Objectives and Research Themes
This thesis examines the influence of ownership structure on the capital structure of German companies, specifically investigating how managerial share ownership and external block holders affect corporate leverage decisions. The primary goal is to address the lack of empirical evidence for Germany in this field and to contribute to the ongoing theoretical debate regarding agency theory perspectives on corporate financing.
- Impact of managerial equity ownership on corporate debt levels
- Influence of external block holders on a firm’s leverage
- Interaction effects between management and external block holders on capital structure
- Application of multivariate regression models to a sample of 95 German companies
- Examination of the non-linear relationship between ownership structure and debt ratios
Excerpt from the Book
2.1.1 Incentive-Alignment Hypothesis
In their seminal paper on agency theory JENSEN/MECKLING proposed that the separation of ownership and control allows managers, the agents, to consume the firm’s resources to their own personal benefit and to the detriment of external shareholders, the principals. Nevertheless, those principal-agent conflicts can be mitigated by internal and external constraints reducing management discretion. Specifically, the incentive structure of management is significantly influenced by managerial equity ownership.
Managerial equity ownership is argued to align shareholders incentives with those of external shareholders, reducing the incentives to consume perquisites (hence incentive-alignment hypothesis). JENSEN/MECKLING derive in their model an optimum level of debt which minimizes total agency costs by balancing the agency costs of external equity and the agency costs of debt. Following this rationale, the relationship between capital structure and management ownership depends on the relative size of the agency costs of equity and debt at varying levels of management ownership.
Summary of Chapters
1 INTRODUCTION: Outlines the research problem regarding ownership structure's effect on capital structure and defines the thesis objectives in the context of German companies.
2 THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE, MANAGEMENT OWNERSHIP AND EXTERNAL BLOCK HOLDERS – PRIOR RESEARCH AND HYPOTHESES: Discusses theoretical pillars, including agency theories, and develops hypotheses regarding management and block holder influences on leverage.
3 ECONOMETRIC ANALYSIS OF OWNERSHIP AND CAPITAL STRUCTURE: Details the data, regression models, and empirical findings, testing the developed hypotheses and performing robustness checks.
4 CONCLUSION: Summarizes the main empirical findings, discusses the significance of the results, and outlines potential areas for further research.
Keywords
Ownership Structure, Capital Structure, Management Ownership, External Block Holders, Agency Theory, Corporate Governance, Debt Ratios, Incentive-Alignment Hypothesis, Management Entrenchment Hypothesis, Econometric Analysis, Germany, DAX, Multivariate Regression, Risk Aversion, Corporate Finance
Frequently Asked Questions
What is the core focus of this thesis?
This thesis investigates how a firm's ownership structure, particularly the stakes held by management and external block holders, influences its capital structure decisions, using a sample of German companies.
Which theoretical frameworks are primarily utilized?
The study primarily utilizes agency theory, specifically examining the incentive-alignment hypothesis and the management entrenchment hypothesis to explain variations in firm leverage.
What is the main objective of this empirical study?
The primary objective is to contribute to the empirical debate by testing whether equity ownership structure can explain cross-sectional variation in capital structure, specifically focusing on the German market.
What research methods are employed in the analysis?
The author uses a multivariate regression approach on cross-sectional data, complemented by univariate analysis and various robustness tests to ensure the validity of the results.
What does the main body of the work cover?
The main body includes a thorough review of prior literature, the development of five specific hypotheses, detailed data and model specifications, and an empirical discussion of the regression results.
Which specific variables characterize the ownership structure in this study?
The study categorizes ownership into management (officers and supervisory board members) and external block holders, further refined by the size of stakes and the type of shareholder (financial, strategic, public).
How does the German institutional background influence the findings?
The thesis notes that unlike in the US, Germany has higher ownership concentration and significant involvement of banks as both shareholders and lenders, which is critical when interpreting the influence of block holders.
Why are technology firms excluded from the final sample?
Technology firms were excluded due to their youth, high volatility, and the impact of the stock market boom and crash on their capital structures, which could have masked the relationships being tested.
- Quote paper
- Dipl.-Kfm. Christian Funke (Author), 2003, Ownership Structure as a Determinant of Capital Structure - An Empirical Study of DAX Companies, Munich, GRIN Verlag, https://www.grin.com/document/25924
