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The controlling shareholder's personal leverage and firm performance

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Abstract:

This article examines the relationship between firm performance and its controlling shareholder's personal loans. We present a model that allows the controlling shareholder to finance company projects through personal loans. Using personal loans, however, will create an incentive for controlling shareholders to pursue risky projects. We test our predictions using a sample of companies from Taiwan and find supporting evidence. We find that firms with a higher personal loan will have a higher risk and worse performance in the future. We also find that the positive relation between risk and personal leverage is time varying: the relation gets stronger in bad times.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500462004

Affiliations: Department of Finance, National Taiwan University, Taipei, Taiwan

Publication date: May 1, 2007

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