Risk Averse Insiders with the Specific Objective Function and the Capital Structure
In this paper, I focus on the capital structure implications of having risk averse insiders with the specific objective function in control. As already argued in Crnigoj and Mramor (2007), employee-governed firms - which are typically more risk averse and in general maximize the wages instead of shareholders' wealth - opt for the lowest possible level of debt since the higher interest payments reduce near term cash flow and increase the bankruptcy risk. Observing relatively low leverage in the large proportion of the firms, some of them actually without any debt, and the fact that far the largest share of financing needs are met by internal sources, I empirically test the dependence of the firm's leverage and the probability of the firm having a bank loan on the fact who governed the firm. Using the questionnaire data for Central Eastern Europe in Baltic States (CEB) from EBRD-World Bank Business Environment and Enterprise Performance Survey, BEEPS (III) (EBRD and World Bank, 2005), which allow us to separate sufficient share of employee-governed and manager-governed firms, I have found that firms governed by insiders operate with significantly lower leverage as well as that the probability that a firm uses a bank loan drops at all if the insiders are the largest shareholders. In all specifications of the empirical models, I control the firm's specific capital structure determinants, industry specific effects and differences in the creditor rights between countries. The paper is structured as follows: in the second section I discuss capital structure implications of having risk averse insiders with the specific objective function in control. In the third section I look at the data while in the forth I present the methodology used in the empirical study. In the fifth section I discus the results and the sixth section concludes. (fragment of text)
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