Ownership and Control Structure as Determinants of Corporate Debt Maturity: a panel study of an emerging market

• Published date: 01 July 2006
• Author: Mehmet Baha Karan,Özgür Arslan
• DOI: http://doi.org/10.1111/j.1467-8683.2006.00509.x
• Date: 01 July 2006

312

CORPORATE GOVERNANCE

© 2006 The Authors

Journal compilation © 2006 Blackwell Publishing Ltd, 9600 Garsington Road,

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Volume 14 Number 4 July 2006

Blackwell Publishing IncMalden, USA

CORGCorporate Governance: An International

Review0964-8410Blackwell Publishing Ltd. 2006

2006144••••ORIGINAL ARTICLES

OWNERSHIP

AND CONTROL STRUCTURE AS DETERMINANTS OF

CORPORATE DEBT MATURITYCOPRORATE GOVERNANCE

*Address for correspondence:

Department of Business Ad-

ministration, Faculty of Eco-

nomics and Administrative

Sciences, Hacettepe University,

Beytepe 06800, Ankara, Turkey.

E-mail:

arslan@hacettepe.edu.tr

Ownership and Control Structure as

Determinants of Corporate Debt

Maturity: a panel study of an

emerging market

Özgür Arslan* and Mehmet Baha Karan

This study highlights the corporate governance potential of debt maturity structure for

Turkish firms through investigating its association with ownership and control structure. We

model leverage and debt maturity as jointly endogenous under simultaneous equations

framework. Firstly, we find that both concentrated ownership structure and presence of a large

shareholder is directly but moderately related to corporate debt maturity. We also document

that it is important for Turkish firms to match maturity of their assets with maturity of their

liabilities. Our findings lend considerable support to the prediction that as firms get

financially strong or have more growth opportunities they shorten their corporate debt

maturity structure. Moreover, despite having a controlling large shareholder or a concentrated

ownership structure, firms with growth opportunities still prefer shorter maturities in order

to solve the underinvestment problems. Finally, firm size is positively associated with long-

term debt and our empirical analysis provides no evidence that taxes affect debt maturity

structure.

Keywords: Debt maturity, concentration of ownership, large shareholder

Introduction

he study of financial decisions has been

moving from the choice between debt

or equity for the establishment of optimum

financial structure towards characteristics of

debt and debt maturity. These movements

have been linked with the agency cost hypoth-

esis (see Jensen and Meckling, 1976; Titman

and Wessel, 1988) and it has been argued that

the choice of debt maturity structure helps to

reduce this cost by mitigating conflicts of inter-

ests (Myers, 1977; Barnea

et al

., 1980; Fama,

1980; Haris and Raviv, 1991; Guney and

Ozkan, 2005). Agency costs arise from the

T

separation of ownership and control inside a

company and they affect the determination of

debt maturity. Lenders prefer short term debt

for firms in which there are more conflicts of

interest between managers and shareholders.

Monitoring managers deters moral hazard by

enabling lenders to detect borrowers’ oppor-

tunistic behaviour and punish it through supe-

rior liquidation and renegotiation of short-

term debt. Therefore, such a way of monitoring

management may lead firms to be subject to

suboptimal debt maturity structures.

La Porta

et al

. (2000) defines corporate gov-

ernance as a set of tools for shareholders and

investors of firms to protect themselves from