This study investigates whether the association between ownership structure and leverage varies with the magnitude of growth opportunities. According to the free cash flow hypothesis, managers receive utility from increasing firm size and the over-investment problem is more severe for firms with fewer growth opportunities. Considering the disciplinary role of leverage on the over-investment problem and ownership structure as a control mechanism to affect financing decisions, we hypothesize that the association between ownership structure and leverage is stronger for firms with fewer growth opportunities. We find that the association between equity ownership and leverage is significant for low-growth firms, but not for high-growth firms. The results mostly hold when sample firms are partitioned into large and small firms to directly control for the effect of firm size on the association between ownership structure and leverage.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Aug 25, 2007
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