Debt and ownership structure: evidence from Italy

In: Corporate Governance: The International Journal of Business in Society, Band 16, Heft 5, S. 883-905

Abstract

Purpose
The purpose of this study is to investigate the relationship between the debt and ownership structure of a sample of Italian-listed companies to measure the role assumed in the control and monitoring of agency costs.


Design/methodology/approach
This study examines a balanced panel data, using both a random effects model and a generalized method of moments model to better capture any problems related to the endogeneity of the variables in the model.


Findings
The results provide evidence of a positive relationship between debt and ownership concentration on the one hand and a negative relationship between debt and institutional investors on the other hand. The debt seems to assume both functions, i.e. the disciplinary role of substitute at low levels of ownership concentration and a complementary role at high levels of ownership concentration.


Practical implications
This study provides three practical implications. The first is that the complementarity between debt and ownership concentration provides evidence of the entrenchment effect and tends to weaken the company financially. Second, the results also provide useful prompts to policy-makers who should encourage the presence of institutional investors. Third, the policy-makers should also encourage the expansion of the stock market to enhance the protection of shareholders, reduce private control benefits and provide Italy the same opportunities as other common and civil law countries to collect risk capital, avoiding the abuse of debt.


Originality/value
The empirical results suggest that ownership concentration increases the degree of corporate debt, whereas institutional investors assume the disciplinary role of monitoring and controlling agency costs. The results provide evidence of both the entrenchment effect and the alignment-of-interests hypothesis and that the expropriation theory seems to prevail over the control and monitoring role.