Simultaneous Determination of Firm Leverage and Private Benefits of Control in French Firms

Abstract

This study investigates whether the firm leverage breed private benefits of control in France ; or that is private benefits of control that drive the firm financing policy. Most French firms are family-owned and highly concentrated and hence the controlling power of block-shareholders. Private benefits of control are particularly high in France. They can be extracted by both large shareholders through related-party transactions and managers via their compensation. If debt effectively curbs the private benefits of control, the controlling party is also given incentives to increase debt. Using a sample of 110 listed firms during 2002-2006, our modeling puts in evidence a simultaneous relationship between firm leverage and the private benefits of control. Empirical results reveal that debt is positively associated with related party-transactions but negatively related with excessive managerial compensation. The controlling shareholders are tempted to increase the firm leverage so as to increase their own private benefits. The manager however wants to maintain his private benefits already siphoned off and aims therefore at reducing the firm debt.