Corporate Governance and Capital Structure: A Spanish Study

Date01 March 2017
DOIhttp://doi.org/10.1111/emre.12088
AuthorJosé López‐Gracia,Noelia Granado‐Peiró
Published date01 March 2017
Corporate Governance and Capital Structure:
A Spanish Study
NOELIA GRANADO-PEIRÓ and JOSÉ LÓPEZ-GRACIA
Faculty of Economics, University of Valencia, Valencia, Spain
This study explores the relationship between capital structure and corporate governance using a data panel of
Spanish listed firms over the period 2005 to 2011. Specifically, two notable conflicts in the area of corporate
governancehave been analysed: (i) managerialownership; and (ii) controlling shareholders ownership.Our findings
confirm a non-monotonic relationship betweenboth managerial ownershipand ownership concentration,and capital
structure. In order to mitigate endogeneity concerns, a number of robustness tests have been performed. The
empirical evidence obtained yields a number of implications such as the shareholders' need to monitor entrenched
managers, the insufficient protective legislation to prevent the expropriation of minority shareholders and the
desirability of examining corporate governance factors in order to better understand a firm's financial policy.
Keywords: corporate governance; capital structure; entrenchment; expropriation; board of directors
Introduction
Over the past 50years, capital structure has become a
common focus for corporate finance research. The most
prominent theoretical approaches stem from: (i) the
assumption of financial balance between advantages and
disadvantages of debt, or the trade-off theory (Rajan and
Zingales, 1995); (ii) the theory of hierarchical selection
of financing sources, or the pecking order theory (Myers
and Majluf, 1984); and (iii) the financial planning in
response to the market, or market-timing theory (Baker
and Wurgler, 2002). What all these approaches have in
common is a strong emphasis on financial and market
factors. In contrast, this study stresses the importance of
the way in which firms are governed and how this
influences financial policy. Accordingly, we attempt to
contribute new insights as an addition to prior research
in the field of corporate governance (e.g. Berger et al.,
1997; Gillan,2006; Bebchuk and Weisbach, 2010;Brown
et al., 2011; Mande et al., 2012; Morellec et al., 2012).
This approach takes as its starting point the fact that
corporate governance affects agency costs arising
between shareholders and creditors on the one hand, and
between shareholders and managers,on the other (Jensen
and Meckling, 1976). In addition, there is another
significant agency conflict stemming from the competing
interests of controlling shareholders and minority
shareholders (Shleifer and Vishny, 1997). Given that
agency costsplay a decisive role in determiningthe capital
structure, corporate governance becomes key to
establishing the financial policy of the company.
This study focuses on examining two problems in
particular. Firstly, the managerial entrenchmenteffect,
whereby managers who attain significant power of
control, act in their own interests and pursue financial
policies that are contrary to the interests of shareholders
(Mehran, 1992; Jiraporn and Liu, 2008). For example,
managers may seek to reduce leverage, which affords
them greater leeway to act in their own interests by
avoiding the disciplinary effect imposed by the timely
payment of interest and debt repayment. Similarly,
managers may reduce leverage to avoid the risk of
insolvency, which could ultimately cost them their jobs
(Berger et al, 1997).
Secondly, the expropriation effectrepresents an
interesting area of study. This is where controlling
shareholders carry out certain actions to suit their own
ends, at the expense of minority shareholders. Shleifer
and Vishny (1997) contend that the voting rights
associated with ownership of shares are of little value
when they are extremely dispersed and, conversely,
acquire great power in terms of decision-making when
concentrated. Unlike Anglo-Saxon countries such as the
United States and the United Kingdom, continental
European countries, along with many others around the
world, generally offer only limited investor protection
Correspondence: Jose Lopez-Gracia, Faculty of Economics, Universityof
Valencia, Campus de Tarongers s/n, 46071Valencia, Spain. E-mail jose.
lopez@uv.es
European Management Review, Vol. 14, 3345, (2017)
DOI: 10.1111/emre.12088
© 2016 European Academy of Management

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