Ownership Concentration and Capital Structure Adjustments

We investigate the capital structure dynamics of a panel of 766 firms from five Western Europe countries: France, Italy, UK, Germany and Switzerland over the period 1996-2007. If firms adjust their capital structure towards an optimal level with adjustment costs affecting this optimization behavior, then firms with a concentrated ownership structure should adjust their leverage at a slower rate. Indeed, large blockholders are likely to avoid control-diluting equity issuances. They may also face higher transaction costs arising from the extent of adverse selection problems they face or because of the lower liquidity of their stocks. Besides, one can expect them to avoid large upward leverage adjustments in order not to increase the risk of their undiversified portfolio. However, if firms are indifferent towards their capital structure, past timed securities issuances should have a persistent impact on their current leverage regardless of their ownership structure. Using system-GMM methodology on panel data, we find that European firms have a target leverage to which they revert at different rates. The speed of adjustment is the lowest for firms with a single large blockholder. These results extend previous literature by introducing the transaction costs and the agency costs inherent to ownership concentration as significant determinants of capital structure dynamics.