European Capital Structures: Managerial Insight and Governance Regimes

Abstract

We investigate the determinants of Capital Structure in Europe and we implement a novel approach focusing on the relevance of manager’s knowledge and behaviors for leverage ratios in aggregate. We show that this relevance is moderated by the governance structure of firms. Specifically we show that firms with concentrated-ownership exhibit a negative relation between managerial sentiment and both measures of leverage (market and book leverages) while firms with dispersed ownership exhibit a positive relation to market leverage only (no relation is obtained on medium-range firms). We further show that other dimensions relating to transparency, size & prominence moderate the relationship. Our contribution extends to debates on agency and corporate governance. We emphasize the practical importance between two dominant views of agency: managers vs. shareholders and control-holders vs. minority shareholders. While illustrating this relevance, we suggest that different governance structures, that is, different kinds of agency conflicts, lead to different managers’ behaviors in aggregate and different market valuation of these behaviors. An implication is that a normative assessment of managerial action may depend on the underlying governance regime.