External Corporate Governance, Capital Structure, and Firm Value

• Main Authors: Chien-Ju Lin, 林倩如
• Other Authors: Hui-Min Chung
• Format: Others
• Language: en_US
• Published: 2007
• Online Access: http://ndltd.ncl.edu.tw/handle/08619543311763697054

碩士 === 國立交通大學 === 財務金融研究所 === 95 === In the free-cash-flow theory, shareholders use debt to discipline managers and maximize firm value. In contrast, managerial models assume that, without a takeover threat, managers will not lever up to constrain themselves. Debt seems to be an efficient mechanism of corporate governance. This paper shows how capital structure is influenced by corporate governance which is measured as the strength of shareholder rights. We also investigate the effect of corporate governance and leverage work on firm value. Our analysis is mindful of the potential endogeneity between firm value, shareholder rights, and debt ratio. The empirical evidence shows an inverse relationship between leverage and shareholder rights, suggesting that firms adopt higher debt ratios where shareholder rights are more restricted. This result is consistent with agency theory, which predicts that leverage helps alleviate agency problems.