The impact of divergence in voting and cash-flow rights on the use of bank debt

Abstract

This paper examines the debt ownership structure of firms with corporate governance problems associated with the divergence in the controlling shareholders' voting and cash-flow rights. Previous studies suggest that debt can play an important role in mitigating corporate governance problems. However, not all debt can effectively manage the corporate governance problems associated with the financing of poorly governed firms. In this study, we find that firms with higher divergence in voting and cash-flow rights use significantly more bank debt financing. Moreover, the effect of the divergence in voting and cash-flow rights on the use of bank debt is greater in countries with weaker legal protection for investors. Overall, our findings suggest that bank debt has a comparative advantage in financing poorly governed firms.