Do shareholder protection and creditor rights have distinct effects on the association between debt maturity and ownership structure?

• DOI: http://doi.org/10.1111/jbfa.12430
• Published date: 01 May 2020
• Author: Paulo Renato Soares Terra,Eduardo Schiehll,Henrique Castro Martins
• Date: 01 May 2020

DOI: 10.1111/jbfa.12430

Do shareholder protection and creditor rights have

distinct effects on the association between debt

maturity and ownership structure?

Henrique Castro Martins1Eduardo Schiehll2

PauloRenatoSoaresTerra

3

1Pontifícia UniversidadeCatólica do Rio de

Janeiro – PUC-Rio, IAGBusiness School, Rio de

Janeiro, Brazil

2HEC-Montréal and Aalto University School of

Business, Montréal, Canada

3FundaçãoGetúlio Vargas, Escola de

Administraçãode Empresas de São Paulo, São

Paulo,Brazil

Correspondence

EduardoSchiehll, HEC-Montréal and Aalto

UniversitySchool of Business, 3000 Chemin de la

Côte-Sainte-Catherine,Bureau 5369, Montréal,

QC,H3T 2A7, Canada.

Email:eduardo.schiehll@hec.ca

Authorsare listed in alphabetic order.

Fundinginformation

SocialScience and Humanities Research Coun-

cilof Canada, Grant/Award Number: 435-

2018-1522;Autorité des marchés financiers,

Grant/AwardNumber: SC-2691

Abstract

This study examines the effects of the firm’s ownership concentra-

tion and its institutional environment on corporate debt maturity

choices. As ownership concentration and debt maturity are alterna-

tive governance mechanisms, we theorize and investigate whether

their association is influenced by country-level governance factors

that enhance outside monitoring by minority shareholders and

debtholders. Our investigation is based on a dataset of 50,599 firm-

year observations from 38 countries. We use a propensity-score

matching approach and find that the effect of ownership concen-

tration on debt maturity is conditional to country-level governance

attributes. Ownership concentration has a negative effect on debt

maturity in countries where both shareholder protection and cred-

itor rights are weak. Ownership concentration, however, tends to

lengthen debt maturity as protection increases, and this positive

effect on the length of debt maturity is stronger in countries enhanc-

ing protection towards debtholders (instead of shareholders). We

also explore other characteristics of ownership structure, such as

the identity and presence of controlling shareholders. These results

corroborate the view that entrenched shareholders may use debt

maturity opportunistically.Our study provides new insights into the

interplay between firm- and country-level governance mechanisms

and a deeper understanding of cross-country differences in the

association between ownership structure and debt financing.

KEYWORDS

agency costs, comparative analysis, corporate governance, creditor

rights, debt maturity, investor protection, shareholder protection

JEL CLASSIFICATION

G32, G34, O57

708 c

2019 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/jbfa JBus Fin Acc. 2020;47:708–729.

MARTINS ETAL.709

1INTRODUCTION

Debt maturity has most often been examinedin the literature as a result of internal governance configuration and how

creditors perceive firms’ debt-related agency costs (i.e., Cho, El Ghoul, Guedhami, & Suh, 2014; Datta, Iskandar-Datta,

& Raman, 2005). Another growing stream of research has investigated how institutional differences across countries

influence firms’ debt maturity choices (e.g., Fan, Titman, & Twite, 2012). These studies build mainly on the law and

finance literature, following La Porta and colleagues (e.g., La Porta, Lopez-de-Silanes, Shleifer,& Vishny, 1998; 2000)

and focus on the effects of country-level attributes such as legal origin, corruption, or investorprotection, with limited

consideration of the interactionswith firm-level governance mechanisms. We believe that these two research streams

still have much to learn from each other. Hence, this study investigateshow the interplay between the firm’s owner-

ship structure and its institutional environment—the strength of protection provisionsto shareholders and creditors—

affects the maturity structure of debt financing. More precisely, we address the following research question: How

does the combined strength of countries’ minority shareholder protection and creditor rights influence the associa-

tion between the firm’s ownership concentration and maturity structure of debt financing?

Our study is mainly motivated by the perspectives of cross-national diversity of corporate governance

(Aguilera & Jackson, 2003) and that country-level governance provisions intended to protect suppliers of capital—

shareholder protection and creditor rights—can combine in different forms and strengths (Fan et al., 2012; Giofré,

2013). Prior research has provided empirical evidence that varieties exist across (Aerts, Cheng, & Tarca, 2013;

Biddle, Hilary, & Verdi,2009; Qi, Roth, & Wald, 2011) and within countries (Deakin, Mollica, & Sarkar, 2017) in terms

of protection provisions for suppliers of capital. Such variety exists because shareholders and creditors coexist and

have different and, sometimes, conflicting interests (Giofré, 2013).For instance, minority shareholder protection may

attract equity investmentsbut damage creditors’ interests if insiders have more discretion—i.e. weak creditor rights—

over risk-taking decisions than is perceived as optimal bydebtholders. Conversely, the strength of creditor rights may

favor the supply of long-term debt, but large shareholders may choose short-term debt to avoid close monitoring by

debtholders (Cho et al., 2014) or the risk of losing control (Pindado, Requejo, & De La Torre,2015).

We build and extend this prior literature by investigating the joint effect of the firm’s ownership structure and

its institutional environment on debt maturity. Given the variety of protection provisions across and within coun-

tries (Deakin et al., 2017; Giofré, 2013), we contend that a distinction between country-level mechanisms intended

to enhance creditor rights versus minority shareholder protection is crucial to better understand variations in corpo-

rate debt maturity across firms and countries. Taken together, our results corroborate this view. Consistent with prior

research, we provideevidence that debt maturity is negatively associated with the firm’s ownership concentration (i.e.,

Datta et al., 2005; Garcia-Teruel & Martínez-Solano, 2010) and positively associated with the strength of protection

provisions for suppliers of capital (i.e., Antoniou, Guney, & Paudyal,2006; Fan et al., 2012). Moreover, we show that

ownership concentration is negatively (positively) associated with debt maturity in environments where both types

of suppliers of capital are weakly (strongly) protected. This association, however, changes in environments offering

stronger and unbalanced protection to at least one supplier of capital. Ownership concentrationtends to lengthen debt

maturity as protection increases, and this positiveeffect on the length of debt maturity is stronger in countries enhanc-

ing protection towards debtholders (instead of minority shareholders) We interpret our findings as evidencethat insti-

tutional environmentswith unbalanced, or asymmetric, protection provisions may provide incentives to insiders to use

debt maturity opportunistically to avoid debtholders frequent and closer monitoring or the risk of losing control in the

case of financial distress.

Our results extend prior literature in several ways. First, our study responds to recent calls to examinehow the

interplay between firm- and country-level attributes shape a country’s capital domain (Aguilera& Jackson, 2003) and

explain cross-country variations in corporate outcomes (Haxhi & Aguilera, 2017; Witt & Redding, 2013). As such, our

results provide a comparative picture on how property rights to different suppliers of external capital (i.e., minority

shareholder and debtholders) shape a country’s capital domain by establishing rights that might favor different types

of investors.While previous research in this topic has focused on agency conflicts between shareholder and managers,