Ownership, capital structure and financing decision: Evidence from the UK

This paper examines whether and to what degree agency conflicts in ownership structure affect firm leverage ratios and external financing decisions, using a universal sample of UK firms from 1998 to 2012. We use two distinctive measures to capture ownership structure, namely, managerial share ownership (MSO) and institutional ownership. Our empirical results show a non-monotonic relation between MSO and the debt ratio, supporting two competing theories: interest alignment theory and the management entrenchment hypothesis. Nevertheless, institutional ownership is found to be positively related to firm leverage levels. Our results further suggest that firms with concentrated MSO decrease their leverage by increasing the probability of issuing equity over bonds, an effect strengthened during hot market periods.