Notice of Retraction: The effects of managerial power on debt financing choice

Abstract

Agency theory suggests that debt reduces managerial discretion over corporate resources because higher debt financing increases the commitment and pressure to distribute surplus cash as repayment of debt obligations. Using cross-sectional data from 127 Chinese private listed companies during the period of 2003-2004, this paper examines the relationships between managerial power and firm's debt financing choice. Focusing primarily on the power the managers have over the board as a consequence of his formal position, status as the chairman of the board, and status as the board's sole insider, we find that firms with powerful managers have low level of debt and low level of short-term debt. These results suggest that powerful managers have greater incentives to avoid debt and short-term debt.