An empirical investigation of the implications of control theories of capital structure
This dissertation provides a survey of the empirical implications of the theoretical corporate control literature. Three of the four corporate control theories studied depend on having a non-equity variable such as debt or antitakeover measures (ATM's) for management control of voting power leading to a hypothesized substitutionary relationship between leverage and ATM's as management maximizes firm equity value. A complementary relationship between leverage and ATM's is associated with managerial entrenchment. The estimation is conducted using two samples and techniques. The first technique only ascertains the relationship between leverage and the level of ATM's without introducing any further simultaneous relationships. This first sample consists of large manufacturing firms studied in cross-section at the end of 1986 and yields mixed (significant positive and negative, respectively evidence of substitutionary and complementary behavior) associations between ATM's and leverage and a significant negative association between leverage and the presence of the fair price measure and poison pill. Factors shown by earlier studies to be related to higher acquisition likelihood, variables implying board dominance by management, and outside directors are all shown to be associated with higher antitakeover measures. The second sample consists of unregulated and nonfinancial companies covering the period from the second quarter 1987 to the third quarter 1991. Takeover premium; the fractional ownership of the firm by managers and directors; takeover likelihood; company leverage; and the likelihood of having the fair price/supermajority measure, a classified board, and/or a poison pill are modeled to estimate a seven equation simultaneous relationship. Mixed effects that ATM's have on leverage are once again seen along with higher leverage being significantly associated with fewer fair price/supermajority measures and with more classified board and poison pill measures. Both fair price/supermajority and classified board measures are associated with significant decreases in the chance of a firm being taken over with the opposite being seen for poison pills.
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