Theory and Evidence on the Relationship Between Ownership Structure and Capital Structure

The agency relationship between managers and shareholders has the potential to influence decision-making in the firm which in turn potentially impacts on firm characteristics such as value and leverage. Prior evidence has demonstrated an association between ownership structure and firm value. This paper extends the literature by proposing a further link between ownership structure and capital structure. Using an agency framework we argue that the distribution of equity ownership among corporate managers and external blockholders has a significant relationship with leverage. The empirical results provide support for a positive relationship between external blockholders and leverage, and curvilinear relationship between the level of managerial share ownership and leverage. The results also suggest that the relationship between external block ownership and leverage varies across the level of managerial share ownership. These results parallel and are consistent with the 'active monitoring', 'convergence-of-interests' and the 'entrenchment' hypotheses.