“Ownership Concentration, ‘Private Benefits of Control’and Debt Financing

Building on the ‘law and economics’ literature, this paper analyses corporategovernance implications of debt financing in an environment where a dominant owner isable to extract ex ante ‘private benefits of control’. Ownership concentration may result inlower efficiency, measured as a ratio of a firm’s debt to investment, and this effect dependson the identity of the largest shareholder. Moreover, entrenched dominant shareholder(s)may be colluding with fixed-claim holders in extracting ‘control premium’. One of possibleoutcomes is a ‘crowding out’ of entrepreneurial firms from the debt market, and this issupported by evidence from the transition economies....