Company Structure
   The empirical literature on ownership 
   and control is conveniently divided into 
   two themes. The first examines the 
   influence of ownership structure on the 
   dividend policies of the firm. The second 
   investigates the impact of management 
   shareholdings on the firm’s debt ratio. 
   Although clearly relevant to capital 
   structure, dividend policy is a major 
   subject in its own right and the 
   literature on this topic is well surveyed 
   by Short (1994). Accordingly, in this 
   section we concentrate on the impact of 
   management shareholdings on debt 
   ratios. 
   Continued
   Zeckhauser and Pound (1990) test whether large 
   shareholders improve corporate performance by encouraging 
   performance-tilting, the practice which arises under 
   asymmetric information between shareholders and managers 
   and results in improvements of corporate performance 
   without the diminution of managerial effort or of excess pay. 
   This is because large shareholders can exploit economies of 
   scale in information costs, which reduces the agency 
   (monitoring) costs of debt. If true, this implies that the 
   leverage of firms with at least one large shareholder should 
   be higher than that of a firm that does not have a large 
   shareholder. In fact, Zeckhauser and Pound (1990) find that 
   there is no significant difference in leverage ratios between 
   such groups of firms. They conclude that large shareholders 
   appear to perform a monitoring function only for equity 
   owners and do not have a positive impact on debtholders.
   Continued
    Friend and Hasbrouck’s (1988) study differs from Zeckhauser 
   and Pound in terms of investigating whether there is a 
   systematic relationship between insider (manager) holdings 
   and debt. Two proxies are used here: the first is a fractional 
   ownership variable, the largest fraction of shares that is held 
   by an insider, whilst the second is an absolute variable, the 
   market value ofequity held by the largest insider. A priori, 
   there could be either a negative or positive relationship 
   between debt and insider holdings: negative, if the rise in 
   bankruptcy costs for insiders outweigh the reduction in their 
   agency costs; positive, if the reverse is true. Friend and 
   Hasbrouck find that, when both the fractional and absolute 
   insider holdings are included, the former becomes positive 
   and significant whilst the latter becomes more negative.
   Continued 
    In addition, the explanatory power of the 
   fractional variable dominates that of the 
   absolute. These results provide some weak 
   support for the hypothesis that insider ownership 
   does reduce the agency cost of debt. However, in 
   these regressions, it should be noted that 
   causality runs from the insider holding measure 
   to the debt ratio. Friend and Hasbrouck suggest 
   that a reverse causality may also occur: a high 
   level of debt increases the risk of firm stock, and 
   tends to drive out outside shareholders.
      Word Study
                          Ownership 
                          Corporate 
                          Shareholders 
                          Exploit 
                          Significant 
                          Improvements 
                          Regressions 
                          Insider 
                          Causality
                          Whilst
                          Equity