Do Entrenched Managers Prefer Bond?

Yihua Zhao and Lin Zou

Prior research has documented both positive (John and Litov, 2009) and negative (Berger, Ofek, and Yermack, 1997) relationships between managerial entrenchment and the use of debt. This paper further investigates the impact of corporate governance on firm’s leverage by taking into account the substitution effect of different governance mechanisms. Consistent with John and Litov (2009), we find that antitakeover provisions have a positive effect on firm’s leverage. However, this effect disappears when we control for the interaction effect between antitakeover provisions and board power, measured by board independence. More specifically, we find that entrenched managers operate highly leveraged firms only if they are exposed to powerful boards. The result on this positive relationship between firm’s leverage and the interaction of board power and antitakeover provisions continues to hold even after we consider other governance variables.

Field of Research: Finance

Key Words: Antitakeover Provisions, Board Power, Firm Leverage

JEL Codes: G32 and G34

DOI : http://dx.doi.org/10.21102/irbrp.2015.03.111.04