Strategic ownership structure and the cost of debt

Abstract

We theoretically and empirically address the endogeneity of corporate ownership structure and the cost of debt, with a novel emphasis on the role of control concentration in post-default firm restructuring. Control concentration raises agency costs of debt, and dominant shareholders trade off private benefits of control against higher borrowing costs in choosing their ownership stakes. Based on our theoretical predictions, and using an international sample of syndicated loans and unique dynamic ownership structure data, we present new evidence on the firm- and macro-level determinants of corporate control concentration and the cost of debt. (JEL G21, G32) It is a stylized fact that corporate ownership is concentrated (Holderness 2009). Moreover, in much of the world, dominant shareholders, whose control (or voting) ownership exceeds significantly their cash-flow stakes, typically control public companies.1 The determinants and consequences of such ownership structures have received extensive attention. In particular, La Porta, Lopez-de-Silanes, and Shleifer (1999) and La Porta et al. (1998) argue that variations in control concentration across countries are driven b