Ownership structure, control contestability, and corporate debt maturity

Highlights

• We study the effect of ownership structure on corporate debt maturity.

• Ownership–control wedge leads to longer debt maturity.

• Multiple large shareholders (MLS) are associated with shorter debt maturity.

• MLS and short-term debtholders play an effective monitoring role.

Abstract

The corporate governance literature has shown that self-interested controlling owners tend to divert corporate resources for private benefits at the expense of other shareholders. Such behavior leads the controlling owners to prefer long maturity debt to short maturity debt, to avoid frequent monitoring by lenders, which creates conflict between controlling and minority shareholders over the maturity structure of debt. In this paper, we examine whether the presence of multiple large shareholders (MLS), beyond the controlling owner, helps to mitigate this conflict. Using a large data set of French publicly traded firms during the period 1998–2013, we find strong evidence that firms with MLS exhibit shorter debt maturity. This result suggests that MLS curb the extraction of private benefits by the controlling owner and reduce her preference for less monitoring through the use of longer maturity debt. The findings are robust to a number of checks, including addressing endogeneity concerns and using alternative sample compositions and alternative regression frameworks.

Introduction

Over the last three decades, a substantial amount of research has been focused on the maturity structure of corporate debt. Building on the seminal works of Myers (1977), Flannery (1986), and Diamond (1991), among others, several studies provide evidence that firm characteristics (e.g., growth opportunities, asset maturity, and firm size) are important determinants of debt maturity.¹ More recently, the role of corporate governance in determining debt maturity has emerged as a central theme in this literature. In this vein, Datta et al. (2005) show that managerial ownership affects debt maturity choice. Jiraporn and Kitsabunnarat (2007) provide evidence that corporate debt maturity depends on the strength of shareholder rights. Harford et al. (2008) show that a strong board is associated with shorter maturity debt. Brockman et al. (2010) find that CEO compensation incentives also affect the maturity structure of corporate debt.

While these papers document interesting results on how governance mechanisms affect debt maturity, their conclusions have been limited by their focus on the U.S. market, where the agency conflict is likely to be between managers and shareholders (type I agency problem) (Jensen and Meckling, 1976). However, the main agency problem outside the United States is that between controlling and minority shareholders, called the type II agency problem (see, e.g., Claessens et al., 2000, Dyck and Zingales, 2004, Faccio and Lang, 2002, La Porta et al., 1999). The larger the control–ownership wedge of a controlling owner, the more incentives she has to divert corporate resources for private benefits at the expense of minority shareholders. Previous studies, such as Claessens et al. (2002), show that the risk of expropriating minority shareholders by controlling owners is the dominant agency problem in most countries. However, the impact of this agency problem on corporate debt maturity remains largely underexplored.

Moreover, the literature (e.g., Claessens et al., 2000, Faccio and Lang, 2002, La Porta et al., 1999, Thomsen et al., 2006) documents the existence of a significant number of firms controlled through multiple large shareholders (MLS) structures outside the United States. For instance, Claessens et al. (2000) find that 32.2% of East Asian firms have at least two large shareholders (at the 10% threshold). Faccio and Lang (2002) document that MLS are present in almost 46% of concentrated ownership firms in Western Europe (at the 10% threshold). Similar findings are reported by Laeven and Levine (2008), who show that 34% of European firms have at least two large owners.

A growing body of empirical research suggests that MLS may play an important governance role in curbing the diversion of corporate resources. In this vein, MLS have been shown to play a valuable monitoring role over the controlling owner, which results in higher firm valuations (Attig et al., 2009, Laeven and Levine, 2008, Maury and Pajuste, 2005), lower costs of equity capital (Attig et al., 2008), higher dividend rates (Faccio et al., 2001), and so forth. However, a serious effort to link the governance role of MLS to debt maturity is absent from the literature. We fill this gap by examining the effects of MLS presence and control contestability of the largest owner on debt maturity.

We argue that debt maturity choice is affected not only by the private benefits the controlling owner can capture but also by the ability of MLS to curb the extraction of these benefits. An entrenched controlling owner tends to insulate herself from external monitoring to protect her private benefits of control. Therefore, she prefers longer maturity debt to avoid monitoring by the lenders for a longer period. However, previous studies argue that MLS may have strong incentives to monitor the controlling owner and to improve corporate governance (e.g., Bennedsen and Wolfenzon, 2000, Bloch and Hege, 2001). Hence, their presence and power impairs the ability of the controlling owner to divert corporate resources, which reduces her tendency to choose long-term debt.

In this paper, we examine the role of MLS in determining debt maturity by considering a large sample of French listed firms over the period 1998–2013. To obtain a complete picture of how large shareholders affect debt maturity, we begin by empirically examining whether, in our sample, controlling shareholders are indeed extracting private benefits of control. We also examine whether MLS and short-term debtholders curb the consumption of these benefits. For this purpose, we perform firm value regressions using a sample that includes widely held and concentrated ownership firms. We find that the presence of a controlling owner and the degree of separation of her control rights and cash flow rights are associated with lower firm valuations. This result implies that self-interested controlling owners have incentives to extract private benefits of control to the detriment of minority shareholders, which results in lower firm values. Moreover, we show that the effect of controlling owners on firm value is significantly less pronounced when MLS or short-term debtholders are present, which indicates that other large shareholders, beyond the controlling owner, and short-term debtholders play an effective monitoring role that limits the controlling owner's ability to extract private benefits of control. Furthermore, we provide evidence that short-term debtholders are able to reduce private benefits over and beyond what MLS could do themselves.

To investigate the impact of MLS on debt maturity, we limit our sample to concentrated ownership firms. After controlling for standard determinants of debt maturity, we report evidence suggesting that the presence of MLS and the extent of their contestability of the power of the largest controlling owner are associated with lower debt maturity. This finding supports the view that MLS limit the controlling owner's private benefits of control and reduce her need to evade scrutiny by lenders through the choice of long maturity debt over short maturity debt. We also find that debt maturity is positively associated with the control–ownership wedge of the controlling owner, indicating that entrenched controlling owners prefer longer maturity debt to avoid frequent monitoring by the debt market. These results are robust to a battery of sensitivity tests, including addressing endogeneity issues, using alternative proxies for MLS presence and voting power, and considering alternative sample compositions and regression frameworks.

This study advances the literature in several ways. First, it is, to the best of our knowledge, the first to examine how MLS presence and voting power determine corporate debt maturity structure. Thus, it adds a new dimension to the literature on capital structure choice in the presence of agency conflicts between controlling and minority shareholders. Second, it contributes to the corporate governance literature by shedding light on a channel through which the governance role of MLS could affect firms' financing decisions (i.e., the choice of debt maturity).

This study also offers new evidence on the determinants of debt maturity by focusing on a concentrated ownership context (i.e., France). Studies investigating the determinants of debt maturity in France are rare.² However, France provides a suitable laboratory for examining the role of MLS in mitigating the adverse effects of controlling owners on debt maturity. French listed firms typically have concentrated ownership structures and are controlled by large shareholders through different mechanisms, such as pyramid structures, non-voting shares, and double-voting shares. For instance, Faccio and Lang (2002) present evidence suggesting that only 14% of French listed firms in 1996 are widely held at the 20% threshold. Boubaker (2007) reports similar results using ownership structure data for the year 2000. These mechanisms allow controlling owners to hold more control rights than cash flow rights, which gives them incentives to extract private benefits of control at the expense of minority shareholders. In light of this, we expect that some aspects of financing decisions, such as the choice of debt maturity, are affected by the incentives of controlling owners to extract private benefits of control and to avoid monitoring by outsiders.

In addition, research has shown that a large proportion of French listed firms have MLS with substantial voting rights. In this vein, Faccio and Lang (2002) find that about 33% of French listed firms have more than one large shareholder. Boubaker (2007) also documents that MLS are present in 34% of French listed firms. Similarly, Laeven and Levine (2008) show that firms with MLS represent more than 36% of their sample of French firms. The existence of those MLS is also expected to have an impact on debt maturity decisions, since they have the power to monitor the controlling owner.

In terms of debt maturity, empirical research has shown that French listed firms have higher fractions of long-term debt in their capital structures compared to firms in other European countries. In this vein, Antoniou et al. (2006) find that the average ratio of long-term debt to total debt is higher in France (59%) than in Germany (53%) and the United Kingdom (46%). El Ghoul et al. (forthcoming) and Zheng et al. (2012) also report that, on average, French firms have longer debt maturities than many other European countries, such as Germany, Italy and the United Kingdom. Therefore, it is important to identify the factors that lead French firms to use more long-term debt. This paper focuses on the role of MLS in determining the choice of debt maturity.

The reminder of the paper is structured as follows. Section 2 discusses the different arguments that link MLS presence and contestability of the power of the controlling owner to debt maturity. The data and definitions of the variables used in the empirical analysis are presented in Section 3. The empirical design and the results are discussed in Section 4. Section 5 presents the robustness tests. The last section concludes the paper.