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Ownership Structure and the

Cost of Debt
a b
Juan Pedro Sánchez-Ballesta & Emma García-Meca
a
Accounting Department, Facultad de Economía y
Empresa , Universidad de Murcia , Murcia, Spain
b
Accounting Department, Facultad de Ciencias de
la Empresa , Universidad Politécnica de Cartagena ,
Cartagena, Spain
Published online: 03 Feb 2010.
To cite this article: Juan Pedro Sánchez-Ballesta & Emma García-Meca (2011) Ownership
Structure and the Cost of Debt, European Accounting Review, 20:2, 389-416, DOI:
10.1080/09638180903487834
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European Accounting Review
Vol. 20, No. 2, 389– 416, 2011
Ownership Structure and the Cost

of Debt
JUAN PEDRO SÁNCHEZ-BALLESTA and

EMMA GARCÍA-MECA

Accounting Department, Facultad de Economı́a y Empresa, Universidad de Murcia, Murcia,
Spain and Accounting Department, Facultad de Ciencias de la Empresa, Universidad
Politécnica de Cartagena, Cartagena, Spain
(Received: May 2007; accepted November 2009)
ABSTRACT This paper examines the impact on the cost of debt by ownership
concentration and shareholder identity; that is, whether the shareholders are banks, non-
financial firms, the state, institutional investors or the board of directors. Our analysis
suggests that directors who own shares tend to be aligned with external shareholders,
that firms with government ownership enjoy lower cost of debt and that banks
effectively monitor management, so reducing the agency costs of debt.
1. Introduction
To the extent that ownership is separated from control, agency problems become
more important. It has been argued that agency costs of equity arise from direct
expropriation of funds by managers, excessive perquisites, shirking and entrench-
ment. Ang et al. (2000) argue that the magnitude of these costs varies across firms
depending on the ownership structure, and suggest that agency problems may be
mitigated through greater managerial ownership of equity or through monitoring
by specific shareholders.
Although previous research has addressed the relation between ownership
structure and manager – shareholder agency problems, relatively little is known
about the relation between ownership structure and shareholder – debtholder
conflict, or how it affects debt agency costs. As the pioneering work of Jensen
and Meckling (1976) suggested, shareholders may expropriate wealth from
Correspondence Address: Juan Pedro Sánchez-Ballesta, Accounting Department, Facultad de

Economı́a y Empresa, Campus de Espinardo 30100, Universidad de Murcia, Murcia, Spain.
Fax: þ34 868887794; Tel.: þ34 868883807; E-mail: juanpsb@um.es
0963-8180 Print/1468-4497 Online/11/020389–28 # 2011 European Accounting Association

DOI: 10.1080/09638180903487834
Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA.
390 J. P. Sánchez-Ballesta and E. Garcı́a-Meca
debtholders by undertaking risky new projects that will allow them to reap most
of the gains, while debtholders bear most of the cost. Assuming that debtholders
anticipate such behaviour, they will charge a higher premium. However, equity
holders with large undiversified ownership stakes may have different incentive
structures from those of atomistic shareholders (Shleifer and Vishny, 1997).
This paper examines the impact of different dimensions of ownership structure
on the cost of borrowing. We hypothesise that ownership structure influences the
cost of debt by controlling agency costs that result from conflicts between man-
agers and all stakeholders, and from those between shareholders and debtholders.
Most of the research on determinants of cost of debt (Anderson et al., 2003,
2004; Klock et al., 2005) focuses on large corporations with diffused ownership
within the conventional US/UK model of corporate control. This paper extends
that research to a sample of listed Spanish firms. Corporate governance mechan-

isms in Continental countries are fundamentally different from those that govern
US firms. Thus, the determinants of cost of debt should also be different in com-
parison to Anglo-Saxon countries. Spain is particularly characterised by high
ownership concentration. Hence, the agency conflict shifts from one between
principal and agent (US firms) to one between large shareholders and minority
shareholders (La Porta et al., 1999). US firms, operating in a market-based
system, are subject not only to internal monitoring (e.g. from the board) but
also to external market discipline (e.g. from the market for corporate control),
something which is almost absent in Spain. In Spain, banks and holding
companies foster concentration by participating in the ownership of firms.
Thus, monitoring by financial institutions and large shareholders is central to
Spain’s corporate governance.
Our study provides empirical evidence that ownership structure has an econ-
omic impact on the cost of debt. Specifically, we find compelling evidence that
an increase of 1 percentage point in insider and bank ownership would reduce
the cost of debt financing by 0.0436 and 0.0551 percentage points, respectively.
These results confirm that insiders’ interests are aligned with those of external
shareholders and that banks play a monitoring role in reducing agency conflicts
between the firm and creditors. The findings also support the hypothesis that, in
Spain, government ownership may provide easier financing conditions through
the state financial agency, so lowering the cost of debt. In particular, an increase
of 1 percentage point in government ownership would reduce the cost of debt by
0.0704 percentage points. In other terms, an increase of one standard deviation in
insider ownership, bank ownership and government ownership would produce a
reduction in the cost of debt (over its mean value) by 14.62%, 7.95% and 4.10%,
respectively.
This study builds on previous research in several ways. First, we focus on the
role that corporate governance plays in protecting the interests of debtholders – a
stakeholder usually ignored in the academic literature. Second, unlike other
scholars who have studied corporate governance and the cost of debt and who
have usually analysed just one aspect of ownership structure, we focus on both
Ownership Structure and the Cost of Debt 391
degree of ownership concentration and shareholder identity. Finally, we test the

transaction cost theory (Core and Larcker, 2002) in relation to the cost of debt
financing and different ownership identities, and although the results are non-
significant, we think they provide a field for future research, especially in
contexts where ownership structure is diffused and dynamic.
In the next section, we provide an analytical framework to help explain how
ownership structure can affect the cost of debt. We then detail the methods
used and describe the sample and variable measures employed in the empirical
analysis. Section 4 summarises the principal findings, and Section 5 extends
the analysis. Finally, we present the conclusions and implications of the results.
2. Previous Literature and Development of Hypotheses

The potential conflicts of interest between managers, shareholders and debtholders

influence capital structure and investment policies, which, in turn, may give rise to
inefficient managerial decisions and ‘suboptimal’ investments that generally fall
under the categories of underinvestment and overinvestment. When a firm has
risky debt and scarce growth opportunities, managers, acting in shareholders’
interest, may reject investment projects with positive net present value (Myers’s
underinvestment, 1977), because the value created would be advantageous only
for the firm’s debtholders and would not avoid distress (debt overhang problems).
On the other hand, overinvestment (risk shifting or assets substitution) results from
management adopting unprofitable or overly risky projects that could damage the
interests of the debtholders (Jensen and Meckling, 1976). In addition, a controlling
shareholder might demand direct payouts of firm assets (dividends) rather than
support a manager’s investments in projects with positive net present value,
thus reducing the mean of the firm’s expected cash flows and perhaps increasing
debt risk. The controlling shareholder may also pursue self-interest at the
expense of minority shareholders. This expropriation may take various forms,
such as misappropriation of investment resources, related-party transactions,
use of transfer pricing, assets stripping, and other forms of ‘tunnelling’ of assets
and revenue from firms (Johnson et al., 2000).
As these agency costs rise, the premium that debtholders require increases, so
raising debt costs (Anderson et al., 2004). Jensen (1986) identified the conflict
between shareholders’ interests and managers’ individual agendas and suggested
that debt is a remedy against this form of agency cost: since debt forces the
company to pay out the excessive cash flow, it decreases the free cash flow
that is at managers’ discretion, and thus in danger of being suboptimally invested.
Extensive research has been devoted to suggesting alternative control mechan-
isms (apart from capital structure decisions) to mitigate these conflicts, and
some of these mechanisms are related to ownership characteristics. Ownership
structure encompasses a broad spectrum of attributes intended to mitigate
agency costs by increasing the monitoring of management’s actions and limiting
managers’ opportunistic behaviour.
We hypothesise that ownership structure may promote effective decision-

making and reduce information asymmetry and moral hazard, thus lowering
the firm’s cost of debt, mainly by increasing the external monitoring of manage-
ment and by increasing the incentive alignment between management and share-
holders. Specifically, we analyse the influence of ownership concentration, bank
ownership, insider ownership and other shareholder identities. The underlying
connections between each of these ownership structure characteristics and cost
of debt are discussed below.
2.1. Ownership Concentration

Concentrated equity holders have a potentially strong impetus to mitigate conflicts
with debtholders. Most of the empirical research (e.g. Jensen, 1993; Shleifer and
Vishny, 1997; Yeo et al., 2002; Bos and Donker, 2004) states that large share-
holders monitor management because of their voting power and their independent,
unbiased view of management policies (the management disciplining hypothesis).
Some researchers, however, have indicated that instead of imposing efficient
monitoring and control on managerial discretion, large-block shareholders may
abuse their dominant position at the expense of other stakeholders, including
debtholders (the wealth redistribution hypothesis). This abuse may be made
easier in countries with underdeveloped financial markets, where a proportion
of control rights far above the cash flow rights may allow large shareholders
to avoid the pressure of some mechanisms, such as the market for corporate
control, and may enable them to expropriate rents from non-controlling share-
holders (Harris and Raviv, 1988; Shleifer and Vishny, 1997). The abuses
may take different forms, such as asset stripping through the use of cross-
shareholdings and pyramids, and cash flow appropriation by increasing dividend
payments (Johnson et al., 1998). Thus, although agency problems between
owners and managers that stem from control and ownership separation could
be less significant in Spanish firms than in US firms, problems such as risk
concentration or expropriation of minority shareholders could arise in the former.
The few previous studies that relate ownership concentration (measured by the
fraction owned by the largest shareholders or by significant shareholders) and
cost of debt find that these shareholders do not appear to have a significant
impact on the cost of debt (Hirshleifer and Thakor, 1992; Anderson et al., 2003).
We address these competing views by testing the following hypothesis:
H1: Ownership concentration is related to the cost of debt.
2.2. Bank Ownership

Bank ownership also has a fundamental role in mitigating agency costs, mainly
in Continental corporate governance systems, where, besides being the main
provider of financial resources, banks enjoy a significant position among the
shareholders of most listed firms. In civil-law countries, such as Spain, financial

markets’ lack of liquidity reduces their efficiency in controlling a firm’s manage-
ment, increasing the importance of banks as supervisors. Thus, banks in Spain
provide most of a firm’s funding and also compensate for the weaknesses of
investor protection laws (de Andrés Alonso et al., 2005). Furthermore, in
Spain, banks’ capabilities in the control and supervision of management are
complemented by their participation in boards of directors.
Ang et al. (2000) find that agency costs are significantly lower with greater
monitoring by banks. The authors suggest that bank monitoring generally comp-
lements shareholder monitoring of managers, so reducing owner-manager agency
costs. According to Hoshi et al. (1990), because banks with financial stakes in
their client firms have the incentive to monitor these firms, information and incen-
tive problems are reduced, so lowering the cost of debt. We pose the following
hypothesis:
H2: Bank ownership is associated with the cost of debt.
2.3. Insider Ownership

Insider ownership can be considered as another governance variable that affects
cost of debt by controlling agency conflicts between debtholders and stake-
holders. Agency theory predicts that low insider ownership implies poor align-
ment of interests between management and stakeholders (Jensen and Meckling,
1976), which leads to opportunistic behaviour by managers that may reduce
the cash flows expected to be available for servicing debt payments, and thus
raise the cost of debt. Ang et al. (2000) provide evidence that agency costs
increase as the equity share of managers declines. Ashbaugh-Skaife et al.
(2006) find a positive relationship between the percentage of shares held by offi-
cers or directors and a firm’s credit ratings. Their results confirm the hypothesis
that increases in insider ownership strengthen managers’ incentives to invest in
positive net value projects and decrease information asymmetry, so reducing
adverse selection, moral hazard and debtholder risk. Hirshleifer and Thakor
(1992), May (1995) and Chen et al. (1998) have also found similar empirical
evidence. Thus, insider equity ownership helps align the interests of managers
and shareholders, and, hence, should alleviate debt-related agency problems,
and lower the cost of debt.
However, insider ownership can be positively related to cost of debt if insiders
use their voting power to expropriate firm resources for their personal benefit
through self-dealing transactions, so exacerbating the agency conflicts between
debtholders and stakeholders. Such transactions include asset sales, contracts
such as transfer pricing which is advantageous to the insider, excessive executive
compensation, expropriation of corporate opportunities, fighting against share-
holder-sponsored proposals to increase the monitoring of managerial actions,
or increasing dividends, which diverts financial resources away from productive
uses and coverage of future debt payments (Gordon and Pound, 1993; López de
Silanes et al., 2000). We test the following hypothesis:
H3: Insider ownership is associated with the cost of debt.
2.4. Other Types of Shareholders: Institutions, Government and

Non-financial Firms
According to Shleifer and Vishny (1997), institutional ownership is an important
mechanism in reducing the cost of debt because institutional owners effectively
and independently monitor managers. Although institutional investors have
recently displayed increasing interest in the Spanish private sector, their
resources remain meagre and their activity is still lower than in other developed
countries.
Previous studies analysing the effect of institutional ownership on the cost of
public bonds (Bhojraj and Sengupta, 2003), cost of loans (Roberts and Yuang,
2006) and cost of equity capital (Ashbaugh et al., 2004) indicate that these
investors do play an important monitoring role that reduces agency risk faced
by debtholders. We test the following hypothesis:
H4a: Institutional ownership is associated with the cost of debt.
Today in Spain the state holds shares in only a few, mainly large, companies,
so government ownership does not obviously provide an implicit guarantee to
debtholders. However, these firms usually experience easier financing conditions
through the state financial agency, which is attached to the Ministerio de Econ-
omı́a y Hacienda (Spanish Ministry of Economy). Literature on the effect of
state ownership on cost of debt is very scarce. In Spain, de Andrés Alonso
et al. (2005) show that firms whose main shareholder is the state show lower pro-
portions of bank debt and are able to borrow from the market, because they can
count indirectly on the state guarantee. Casasola and Tribó (2002) report that
Spanish companies issue market debt to increase their bargaining power with
banks and that the issuance of market debt helps to reduce the cost of bank
debt. In Europe, Borisova (2006) finds that decreases in the percentage of govern-
ment ownership in a firm slightly raise the cost of debt, although not to an
economically significant degree. On average, a decrease in government owner-
ship by 1 percentage point increases the credit spread, used as a proxy for the
cost of debt, by only one half of a base point. We pose the following hypothesis:
H4b: Government ownership is associated with the cost of debt.
Spain is different from other developed countries in the prevalence of inter-

corporate ownership, especially among large firms. An important proportion of
Spanish majority-controlled firms are controlled by other non-financial firms,
so we analyse whether ownership by non-financial corporations influences the

cost of debt in distinctive ways. We pose the following hypothesis:
H4c: Non-financial firm ownership is related to the cost of debt.
3. Methods
3.1. Sample
The sample is drawn from the population of Spanish non-financial firms listed on
the Madrid Stock Exchange during 1999 – 2002. Financial companies are
excluded both because government regulation limits the roles of their boards of
directors and may affect the cost of debt, and also because of their special account-
ing practices. We collected information from three sources: the SABI database
(System of Iberian Financial Statement Analysis), created by Bureau Van Dijk,
the Madrid Stock Exchange and the CNMV (Spanish Securities and Exchange
Commission). Once extreme observations have been suppressed (as we explain
in the next paragraph), combining the three data-sets yields a sample of 234
firm-year observations and 69 firms for the period 1999 through 2002.
3.2. Measuring the Cost of Debt and Ownership Structure

The dependent variable is the interest rate on the firm’s debt, which is calculated
as the interest expense for the year divided by the interest-bearing debt (Pittman
and Fortin, 2004; Francis et al., 2005). The descriptive statistics indicate that this
variable, as often happens with some accounting ratios (Dechow, 1994), shows
some extreme observations because some firms have very small denominators
(interest-bearing debt). Following Pittman and Fortin (2004), we discard nine
observations outside the 96th percentile of the pooled distribution, which have
cost of debt from 14,400% to 83%. This restricts firm’s interest rate to a range
from a minimum of 1.23% to a maximum of 40.4%.1
We use two measures of ownership concentration: the Herfindahl index
(Herfindahl), calculated on the basis of the proportion of common shares held
by the five main shareholders, and the proportion of common shares held by
the largest single shareholder (Largest_sh). We do not analyse here the separate
effects of cash flows and voting rights. In Spain equity ownership is a suitable
variable to proxy control because of its strong correspondence with voting
and, therefore, with the appointment of directors (Leech and Manjón, 2002).2
As a proxy for insider ownership we use the proportion of common shares held
by members of the board of directors, which we represent as Ins_own. Bank
ownership is defined as the proportion of common shares held by commercial
banks (Bank); institutional ownership (Instit_own) and government ownership
(Gov_own) are calculated, respectively, as the proportion of common shares held
by institutional investors and the state. Institutional investors include the following
organisations: insurance companies, pension funds, investment trusts, financial

institutions (excluding commercial banks), investment companies, and other
nominee companies associated with the above categories of institutions. Finally,
firm ownership (Firm_own) represents the proportion of common shares held by
non-financial companies whose ownership is equal to or greater than 5%.
3.3. Control Variables

We include some control variables that have been shown to have significant
impact on borrowing costs (Anderson et al., 2003, 2004; Pittman and Fortin,
2004; Ashbaugh-Skaife et al., 2006). Our intangibles variable (Intang) is
measured by the level of recognised intangibles over total assets. Firms with
high levels of this ratio are perceived as having higher information asymmetry,
which increases the cost of debt. Tobin’s Q (the market value of the firm
divided by the replacement cost of its assets) is the financial proxy of perform-
ance. Our measurement of Q is an approximation used in many studies on corpor-
ate governance (Himmelberg et al., 1999; Demsetz and Villalonga, 2001): sum of
market capitalisation plus long- and short-term debt over the book value of total
assets. Interest coverage (Int_cov) is calculated as the ratio of operating profit
over interest expense for the period. Both variables are used to proxy default
risk; lower Q and Int_cov values reflect greater default risk. Volatility, measured
by the standard deviation of the firm’s operating profit scaled by total assets for
the previous five years, is another proxy for firm risk. We expect volatility to
exhibit a positive relation to cost of debt as profit fluctuations are associated
with higher risk. Leverage, calculated as the ratio of total book debt to total
market value, is also included in the model to control for differences in firms’
financial structures and to proxy default risk. Firms with greater debt intensity
present higher risk to debt providers, and thus are expected to have higher cost
of debt. We include firm size, measured by the natural logarithm of total assets
(Log_assets), to capture any residual risk effect. Generally speaking, larger
firms have lower risk and are expected to have economies of scale in debt
costs. Current ratio, a proxy for liquidity, is calculated as current assets over
current liabilities for the period, and Collateral, calculated as net property,
plant and equipment over total assets, controls for differences in firms’ assets
structure, where firms with greater collateral present lower risk to debt providers
and, consequently, enjoy lower cost of debt. Collateral can also be seen as the
potential capacity of the firm to issue debt with collateral. Some of these variables
(size, leverage, volatility, Tobin’s Q, liquidity) have been included in previous
studies as determinants of ownership structure (Cho, 1998; Himmelberg et al.,
1999; Demsetz and Villalonga, 2001; Cui and Mak, 2002, among others). We
also include a dummy variable in order to control for differences in the cost of
public and private debt. In order to control any possible endogeneity bias
between ownership structure and cost of debt, we have also included in our
model two more specific determinants of ownership structure: asset growth
(Asset_growth), calculated as the growth rate of total assets, and margin

(Margin), which represents the ratio of operating income over sales.
3.4. Descriptive Statistics

Table 1 presents the descriptive statistics for the variables. The cost of debt in the
sample has a mean of 7.43%. The average insider ownership is 20.43%, whereas
the Herfindahl index and largest shareholder have, respectively, means of 35.2%
and 28.3%, and 90th percentile values of 61.7% and 57.5%, thus reflecting a high
degree of ownership concentration in Spain in comparison with other countries.
Table 1. Descriptive statistics

N Mean Median Std. dev. Percentile 10 Percentile 90
Cost of debt 234 0.0743 0.0636 0.0449 0.0363 0.1204
Ins_own 234 0.2043 0.0869 0.2492 0.0001 0.5847
Herfindahl 234 0.3523 0.2719 0.1806 0.2097 0.6174
Largest_sh 234 0.2833 0.2305 0.2129 0.0846 0.5752
Bank_own 234 0.0967 0.0519 0.1072 0.000 0.2643
Instit_own 234 0.1038 0.0522 0.1319 0.0000 0.2896
Gov_own 234 0.0068 0.0000 0.0433 0.0000 0.0000
Firm_own 234 0.3474 0.3179 0.2812 0.0000 0.7384
Log_assets 234 13.6889 13.3000 1.7262 11.7000 16.1000
Int_cov 234 5.0769 2.2559 9.4869 0.3331 11.4384
Collateral 234 0.3923 0.4040 0.1910 0.1230 0.6330
Current 234 1.3587 1.1750 1.0014 0.6600 1.9600
Intang 234 0.0550 0.0233 0.0761 0.0041 0.1489
Q 234 1.7141 1.1275 2.8280 0.7918 2.4588
Volatility 234 17.543 13.5696 15.0530 4.3503 34.7002
Asset_growth 232 0.2405 0.0947 0.7512 20.0541 0.4979
Margin 234 0.0923 0.0764 0.1005 0.0122 0.2053
Leverage 234 0.4778 0.4859 0.2155 0.1931 0.8246
This table provides summary statistics for the data employed in the analysis.
Cost of debt is the interest expense for the year divided by the interest-bearing debt; Block is the
proportion of common shares held by significant shareholders (those whose ownership is equal to
or greater than 5%); Herfindahl is the Herfindahl index for ownership concentration; Largest_sh is
the proportion of common shares held by the largest shareholder; Ins_own is the proportion of
common shares held by members of the board of directors; Bank_own is the proportion of common
shares held by banks; Instit_own is the proportion of common shares held by institutions; Gov_own
is the proportion of shares held by the state; Firm_own is the proportion of common shares held by
other companies that are significant shareholders (5%); Log_assets is the natural logarithm of
total assets; Int_cov is the ratio of operating profit over interest expense for the period; Collateral
is the ratio of net property, plant and equipment over total assets; Current is the ratio of current
assets over current liabilities; Intang is the ratio of the level of intangibles recognised in the
balance sheet over total assets; Tobin’s Q is calculated as the sum of market capitalisation plus
long- and short-term debt over the book value of total assets; Volatility is the standard deviation of
firm’s operating profit scaled by total assets for the previous five years; Asset_growth is the growth
rate of total assets; Margin is the ratio of ordinary income over sales; Leverage is the ratio of total
book debt to total capital, where equity is measured using its market value.
For instance, for the largest shareholder, Park and Shin (2004) report a mean of
26.3% for Canada in the period 1991– 97, and Brammer and Pavelin (2006) get
an average of 15.07% in the UK in 2000, whereas Lakhal (2005) obtains a mean
in France of 38.57% for the period 1998 – 2001, and Lehmann and Weigand
(2000) report an average of 63.98% in Germany for the period 1991 – 96. The
average bank ownership, institutional ownership, firm ownership and govern-
ment ownership are, respectively, 9.7%, 10.4%, 34.7% and 0.68%.
Table 2 describes the industry distribution of the sample. Industries include
Utilities; Non-metallic Minerals and Chemical Products; Construction; Trade,
Restaurants and Hotels; Transport and Communication; Real Estate – Other
Services; and Personal Services. The three main industries are Non-metallic
Minerals and Chemical Products; Real Estate – Other Services; and Trade,
Restaurants and Hotels, which together represent more than 60% of the sample.
Table 3 provides the correlation coefficients between the cost of debt and the
ownership structure variables and control variables. The cost of debt shows sig-
nificant negative correlations with insider ownership, bank ownership, collateral,
asset growth and margin, and significant positive correlations with Herfindahl
index, intangibles ratio and volatility. There are also negative and significant cor-
relations of bank ownership with ownership concentration and insider ownership.
These correlations suggest that bank investors may substitute for, rather than
complement, insider ownership and blockholder mechanisms in mitigating
agency conflicts, which implies that higher levels of monitoring by banks
would be associated with lower levels of monitoring by large shareholders and
insiders.
In general, the analysis indicates that firms with a high proportion of shares
held by members of the board of directors and banks have a lower cost of debt
financing, whereas firms with high concentration (Herfindahl index) have a
higher cost of debt. However, since other variables like collateral, intangibles
ratio, volatility and margin also affect the cost of debt, we use a multivariate
framework to test the hypotheses posed in this paper.
Table 2. Sample distribution by industry

Sector No. of observations % Observations
Utilities 28 11.96
Non-metallic minerals and chemical products 62 26.50
Construction 28 11.97
Trade, restaurants and hotels 37 15.81
Transport and communication 21 8.97
Real estate –other services 46 19.66
Personal services 12 5.13
Total 234 100
This table shows the number and percentage of firm-year observations for each industry group in the
sample using one digit CNAE (Spanish Classification of Economic Activities) codes.
Table 3. Correlation matrix
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18)
Cost_debt 1
Ins_own 20.22 1
Herfindahl 0.13 20.03 1
Largest_sh 0.09 0.08 0.90 1
Bank_own 20.10 20.27 20.34 20.34 1
Instit_own 20.07 20.05 20.21 20.14 0.12 1
Gov_own 20.09 20.12 0.05 0.04 20.02 20.04 1
Firm_own 0.10 0.23 0.48 0.62 20.37 20.37 20.11 1
Log_assets 0.05 20.35 0.00 20.01 0.39 0.14 0.07 20.04 1
Int_cov 20.07 0.07 0.18 0.18 20.13 20.05 20.02 0.06 20.11 1
Collateral 20.32 0.07 20.04 20.03 0.09 0.17 0.21 20.07 0.18 20.16 1
Current 20.05 0.08 20.01 20.07 20.03 20.16 20.10 20.02 20.30
0.01 20.33 1
Intang 0.22 0.00 20.01 0.03 20.05 20.06 20.06 0.17 0.07 20.09 20.23 20.03 1

Q 20.03 0.00 20.03 20.03 20.07 0.09 20.03 0.04 20.16 0.09 20.04 0.04 0.22 1
Volatility 0.11 20.06 20.02 20.05 20.15 20.06 20.07 20.02 20.24 0.00 20.25
0.13
0.02 0.02 1
Asset_growth 20.11 0.00 0.07 0.09 20.03 20.10 0.01 0.10 0.08 0.34 20.03 20.03 0.00 0.02 20.20 1
Margin 20.13 0.03 0.11 0.07 0.16 0.03 0.08 0.00 0.11 0.08 0.33
0.03 20.04 0.07 20.30 0.10 1
Leverage 20.05 20.13 20.04 0.03 0.01 0.07 20.01 0.04 0.22 20.24 0.10 20.13 20.37 20.44 20.11 0.01 20.21 1

p , 0.1; p , 0.05; p , 0.01.
This table provides data on the correlations between variables used in this study.
Cost of debt is the interest expense for the year divided by the interest-bearing debt; Block is the proportion of common shares held by significant shareholders (those whose
ownership is equal to or greater than 5%); Herfindahl is the Herfindahl index for ownership concentration; Largest_sh is the proportion of common shares held by the
largest shareholder; Ins_own is the proportion of common shares held by members of the board of directors; Bank_own is the proportion of common shares held by banks;
Instit_own is the proportion of common shares held by institutions; Gov_own is the proportion of shares held by the state; Firm_own is the proportion of common shares
held by other companies that are significant shareholders (5%); Log_assets is the natural logarithm of total assets; Int_cov is the ratio of operating profit over interest
expense for the period; Collateral is the ratio of net property, plant and equipment over total assets; Current is the ratio of current assets over current liabilities; Intang is the
ratio of the level of intangibles recognised in the balance sheet over total assets; Tobin’s Q is calculated as the sum of market capitalisation plus long- and short-term debt
over the book value of total assets; Volatility is the standard deviation of firm’s operating profit scaled by total assets for the previous five years; Asset_growth is the growth
rate of total assets; Margin is the ratio of ordinary income over sales; Leverage is the ratio of total book debt to total capital, where equity is measured using its market value.
Table 4. Cost of debt by industry – Kruskal– Wallis test

Percentile Percentile
Industry Mean Median Std. dev. 10 90
Utilities 0.077 0.072 0.033 0.043 0.122
Non-metallic minerals and 0.080 0.066 0.048 0.037 0.149
chemical products
Construction 0.071 0.061 0.032 0.033 0.105
Trade, restaurants and hotels 0.068 0.063 0.026 0.043 0.113
Transport and communication 0.082 0.079 0.037 0.039 0.123
Real estate –other services 0.076 0.059 0.068 0.020 0.131
Personal services 0.048 0.046 0.011 0.038 0.063
x2 14.930

p , 0.05.
This table provides data on the descriptive statistics by industry and the Kruskal–Wallis test of
equality of means.
Table 4 provides descriptive statistics of the cost of debt by industry and a

Kruskal– Wallis test of equality of means, which turns out to be significant at
5%. Whereas transport and communication, and non-metallic minerals and
chemical products, have debt costs of 8% or more, the personal services industry
has a cost of debt of only 4.8%. In Table 5 the descriptive statistics on debt com-
position – bank debt vs. public debt – are displayed in absolute values and in
proportion to total assets. Only 67 observations in the sample resort to public
debt (28.6%), whereas, in contrast, all the firms in the sample have bank debt
in all the years of the period. As a consequence, bank debt over assets has an
average of 25% against an average public debt over assets of just 2.5%, a differ-
ence that is significant at 1% and confirms that the main source of debt financing
in Spain is bank debt. However, since financial data of Spanish firms do not dis-
tinguish between interest expenses from public debt and interest expenses from
bank debt, we cannot extend our hypotheses to analyse differences in this respect.
4. Regression Analysis
We initially use the following model to test the association between ownership
structure and the cost of debt financing:
Cost of debtit ¼ b0 þ b1ðIns_ownit Þ þ b2 ðOwnership concentrationit Þ

þ b3 ðBank_ownit Þ þ b4 ðInstit_ownit Þ þ b5 ðGov_ownit Þ
þ b6 ðFirm_ownit Þ þ b7 ðLog_assetsit Þ þ b8 ðInt_covit Þ
þ b9 ðCollateralit Þ þ b10 ðCurrentit Þ þ b11 ðIntangit Þ þ b12 ðQit Þ
þ b13 ðVolatilityit Þ þ b14 ðLeverageit Þ þ b15 ðPublic_debtit Þ
X X
þ ðbt Time_Dumt Þ þ ðbj Ind_Dumj Þ þ 1it (1)
t j
Table 5. Sample composition between bank debt and public debt

Public Bank debt/ Public debt/
Bank debt debt total assets total assets
Mean 1,143,590 642,339 0.249 0.025
Median 151,380 0.000 0.238 0.000
Standard deviation 3,278,609 2,672,421 0.126 0.067
Percentile 10 16,780 0.000 0.095 0.000
Percentile 90 1,937,000 512,000 0.422 0.094
t 22.834
Obs. with Bank_debt . 0 234
Obs. with Public_debt . 0 67

p , 0.01.
This table provides data on the descriptive statistics of the sample composition between public vs.
bank debt and the t-test of equality of means.
where Cost of debt is the cost of debt financing. The independent variables in the
regression include insider ownership, ownership concentration (Herfindahl index
or largest shareholder), bank ownership, institutional ownership, state ownership,
non-financial firm ownership, firm size, interest coverage, collateral, current
ratio, intangibles ratio, Q, volatility, leverage, public debt dummy, and both
year (Time_Dum) and industry (Ind_Dum) dummy variables to control for poss-
ible year or industry effects. Our principal concerns are the coefficients of the
ownership structure variables: b1 to b6. Negative significant coefficients of
these variables would provide support for the hypotheses that increased owner-
ship by insiders, large shareholders, banks, institutions, the state or non-financial
companies effectively alleviates agency problems and reduces the cost of debt.
On the other hand, positive and significant coefficients on b1, b2 and b3 would
provide support, respectively, for the entrenchment hypothesis, the expropriation
effect, and the idea that bank ownership may create conflicts of interests between
the bank and the firm. In a similar way, positive and significant coefficients on b4,
b5 and b6 would support the idea that ownership by institutions, the state and
non-financial companies increases the agency risk faced by shareholders and,
consequently, the cost of debt financing.
Table 6 (columns 1 and 2) reports the regression results using equation (1). The
t-statistics are based on robust White standard errors. Variance inflation factors
for independent variables are below 2.14 in column 1 (Herfindahl model) and
below 2.55 in column 2 (largest shareholder model).3 The results indicate a nega-
tive and significant association between the cost of debt and three variables of
ownership structure: insider ownership (p , 0.01), bank ownership (p , 0.1 in
model 1 and p , 0.05 in model 2) and state ownership (p , 0.05). This suggests
that insiders are aligned with external shareholders, that banks effectively
monitor to reduce the agency costs of debt, and that firms with state participation
face easier financial conditions. These results are in line with those obtained by
Table 6. Regressions of cost of debt on ownership structure and control variables

Original model Original model Two-way cluster Two-way cluster
Intercept 0.1141 0.1160 0.1150 0.1168

(3.70) (3.80) (2.75) (2.95)
Ins_own 20.0436 20.0452 20.0434 20.0449
(24.30) (24.44) (23.69) (23.62)
Herfindahl 0.0172 0.0163
(0.81) (0.52)
Largest_sh 0.0101 0.0088
(0.55) (0.34)

Bank_own 20.0551 20.0592 20.0561
20.0601
(21.86) (22.05) (21.80) (22.04)
Instit_own 0.0062 0.0038 0.0045 0.0024
(0.25) (0.16) (0.16) (0.09)
Gov_own 20.0704 20.0707 20.0707 20.0706
(21.97) (21.99) (22.42) (22.25)
Firm_own 0.0162 0.0161 0.0169 0.0171

(1.22) (1.18) (0.88) (0.93)
Log_assets 0.0011 0.0013 0.0014 0.0016
(0.61) (0.70) (0.74) (0.82)
Int_cov 20.0006 20.0006 20.0006 20.0006
(21.75) (21.74) (22.05) (21.84)
Collateral 20.0776 20.0782 20.0779 20.0785
(23.14) (23.11) (22.81) (22.80)
Current 20.0055 20.0055 20.0054 20.00545
(21.80) (21.83) (21.59) (21.62)
Intang 0.0883 0.0850 0.0931 0.0899
(0.99) (0.96) (1.63) (1.53)
Q 20.0012 20.0012 20.0013 20.0013
(21.72) (21.79) (21.47) (21.57)
Volatility 4.2e205 5.0e205 27.1e205 28.1e205
(20.18) (20.22) (20.15) (20.17)
Asset_growth 20.0059 20.0060 20.0071 20.0072
(21.26) (21.26) (21.36) (21.38)
Margin 0.0160 0.0186 0.0181 0.0206
(0.45) (0.51) (0.31) (0.33)
Leverage 20.0204 20.0214 20.0202 20.0211
(21.21) (21.27) (21.21) (21.32)
Public_debt 0.0067 0.0066 0.0060 0.0058
(0.71) (0.68) (0.58) (0.55)
Adjusted R2 0.2952 0.2936 0.2847 0.2831

p , 0.1; p , 0.05; p , 0.01.
Cost of debt is the interest expense for the year divided by the interest-bearing debt; Herfindahl is the
Herfindahl index for ownership concentration; Largest_sh is the proportion of common shares held
by the largest shareholder; Ins_own is the proportion of common shares held by members of the
board of directors; Bank_own is the proportion of common shares held by banks; Instit_own is
the proportion of common shares held by institutions; Gov_own is the proportion of shares held by
the state; Firm_own is the proportion of common shares held by other companies that are significant
shareholders (5%); Log_assets is the natural logarithm of total assets; Int_cov is the ratio of
operating profit over interest expense for the period; Collateral is the ratio of net property, plant and
equipment over total assets; Current is the ratio of current assets over current liabilities; Intang is the
ratio of the level of intangibles recognised in the balance sheet over total assets; Tobin’s Q is
calculated as the sum of market capitalisation plus long- and short-term debt over the book value of
total assets; Volatility is the standard deviation of a firm’s operating profit scaled by total assets for
the previous five years; Asset_growth is the growth rate of total assets; Margin is the ratio of
ordinary income over sales; Leverage is the ratio of total book debt to total capital, where equity is
measured using its market value; Public_debt is a dummy variable that takes a value of 1 if the firm
issues public debt, and 0 otherwise.
Original models include time and industry dummies, whereas two-way cluster models include
industry dummies.
The t-statistics in original models are based on White robust standard errors. Two-way cluster models
are estimated using t-statistics based on standard errors clustered at the firm and the year level
(Petersen, 2009), which are robust to both heteroscedasticity and within-firm serial correlation.
Hirshleifer and Thaker (1992), Chen et al. (1998) and Ashbaugh-Skaife et al.
(2006), who confirmed that increases in insider ownership reduce information
asymmetry and debtholder risk. Our findings are also similar to Borisova’s
finding (2006) of a negative relationship between government ownership and
cost of debt.
The economic significance of the coefficients 20.0436 on insider ownership
and 20.0551 on bank ownership in model 1 is that an increase of 1 percentage
point in insider ownership or bank ownership (for example, from 15% to 16%)
would reduce the cost of debt by 0.0436 and 0.0551 percentage points, respect-
ively. Regarding state ownership, an increase of 1 percentage point would
reduce the cost of debt by 0.0704 percentage points. If we measure the economic
impact of ownership on the cost of debt as the percentage of change (over the
mean value) in the dependent variable due to a one standard deviation change
in the explanatory variables, all other things being equal, we obtain that an
increase of one standard deviation in insider ownership, bank ownership and
government ownership produces a reduction in the cost of debt by 14.62%,
7.95% and 4.10%, respectively.
Our results are also in line with those studies that do not report a significant
effect of ownership concentration on the cost of loans (Hirshleifer and
Thakor, 1992; Anderson et al., 2003). The influence of ownership by insti-
tutional investors and non-financial firms on the cost of debt is not significant
either.
Among the control variables, the coefficient estimates for interest coverage and
current ratio are significant and negative (p , 0.1), as we expected. This means
that firms with higher interest coverage and liquidity face lower cost of debt
financing since they face a lower default risk. The coefficient on collateral is
also negative and significant (p , 0.01), showing that the nature of firms’
assets is a main factor in signalling guarantees and, consequently, in influencing
the cost of debt financing. Firm performance, represented by Q, also shows, as we
expected, a negative relation to debt cost (p , 0.1).
In Table 6, columns 3 and 4, we check the robustness of our results to serial
correlation. Following Petersen (2009), we use t-statistics based on standard
errors clustered at the firm and the year level.4 The results are very similar to
those of columns 1 and 2.
We also consider the potential endogeneity between cost of debt and owner-
ship structure. In other words, does ownership structure lead to low cost of
debt financing, or may firms with low cost of debt financing also be attractive
for investment by insiders and banks? Although the causality between ownership
structure and the cost of debt is more likely to run from ownership to cost, it is
also possible that the cost of debt could affect ownership structure. We approach
this issue by estimating a two-stage least-squares model (2SLS) (Anderson et al.,
2003; Klock et al., 2005). Since we expect that ownership structure in Spain will
be highly persistent over time, we follow a similar approach to that of Caramanis
and Lennox (2008), and consider that ownership structure variables lagged
one year are powerful predictors of the current year’s ownership structure.
In addition, we consider other variables traditionally considered as determinants
of ownership structure: size, asset growth, margin, Tobin’s Q, volatility, leverage
and cash flow over assets (Cho, 1998; Core and Guay, 1999; Himmelberg et al.,
1999; Cui and Mak, 2002; Pindado and de la Torre, 2008). In the first stage, we
estimate models of ownership structure:
Log_Ownership structure variableit ¼

b0 þ b1 ðLog_Ownership structure variableit1 Þ þ b2 ðMarginit Þ
þ b3 ðSizeit Þ þ b4 ðAsset_growthit Þ þ b5 ðQit Þ þ b6 ðVolatilityit Þ
X
þ b7 ðLeverageit Þ þ b8 ðCash flow over Assetsit Þ þ ðbt Time_Dumt Þ
t
X
þ ðbj Ind_Dumj Þþ1it (2)
j
where Log_Ownership structure variable equals the log of (1 þ Ownership

structure variable). In Table 7 we display the first-stage regressions. We also
report the R2 of the regressions without the lagged ownership variables and the
p-value of a Durbin– Wu – Hausman test of endogeneity. The R2 values of the
regressions with lagged ownership variables are reasonably high, except for
institutional ownership. In contrast, the low R2 values in the regressions
without lagged ownership variables suggest that if we did not include lagged
ownership variables, the instruments to determine ownership structure would
be weak. The results of the Durbin– Wu – Hausman tests in all models do not
reject the hypothesis of no endogeneity. In Table 8, we show the 2SLS results,
which are consistent with our main findings, that is, insider ownership and
bank ownership are negatively and significantly related to the cost of debt.
Regarding Gov_own, since originally there are just 18 observations with values
higher than zero, the loss of significance is probably due to the loss of obser-
vations with the 2SLS estimation.
5. Analysis Extension
5.1. Non-linearities in Ownership Structure
As we have shown in the literature review section, there are competing views
about the effect of ownership structure characteristics on the cost of debt,
and previous studies have found non-linearities in the effect of ownership
structure on several variables, such as firm value and earnings management
(Cho, 1998; Yeo et al., 2002; Koh, 2003). In this section we extend the previous
analyses by testing non-linear relations and interactions between the ownership
structure characteristics. We try to ascertain whether the effect on the cost of
debt of the different dimensions of ownership structure has a different sign
Table 7. Determinants of ownership structure
Log_Ins_own Log_Herfindahl Log_Largest_sh Log_Bank_own Log_Instit_own Log_Gov_own Log_Firm_own
Log_Ins_ownt21 0.9966
(76.39)
Log_Herfindahlt21 0.7388
(11.99)
Log_Largest_sht21 0.7837
(11.05)
Log_Bank_ownt21 0.8059
(15.33)
Log_Instit_ownt21 0.3763
Ownership Structure and the Cost of Debt

(3.95)
Log_Gov_ownt21 0.9881
(64.55)
Log_Firm_ownt21 0.6822
(10.88)
Margin 0.0184 0.1058 0.1240 20.0143 0.0864 20.0006 0.0803
(0.57) (1.11) (1.20) (20.28) (1.06) (20.30) (0.67)
Log_assets 20.0022 0.0035 0.0021 0.0052 0.0073 20.1e205 20.0016
(21.34) (0.98) (0.50) (1.77) (1.44) (20.03) (20.23)
Asset_growth 20.0046 20.0215 20.0251 0.0135 20.0450 0.0014 20.0455
(20.35) (21.10) (21.21) (0.68) (22.00) (1.10) (21.13)
Q 0.0010 20.0013 20.0008 20.0022 20.0015 0.0001 0.0067
(1.06) (20.47) (20.25) (20.85) (20.48) (0.95) (1.01)
Volatility 0.2e205 20.0005 20.0006 20.0002 20.3e204 20.3e205 20.0001
(0.01) (21.26) (21.00) (20.73) (20.08) (20.18) (20.11)
Leverage 0.0305 20.0086 0.0142 20.0216 0.0053 0.0033 0.0641
(1.91) (20.27) (0.34) (20.78) (0.14) (1.37) (0.93)
405
(Continued)
406
J. P. Sánchez-Ballesta and E. Garcı́a-Meca

Table 7. Continued
Log_Ins_own Log_Herfindahl Log_Largest_sh Log_Bank_own Log_Instit_own Log_Gov_own Log_Firm_own
Cash flow over assets 0.0380 20.0030 20.0662 20.0657 0.0253 20.0030 20.1617
(1.14) (20.04) (20.94) (21.33) (0.26) (21.13) (21.32)
Intercept 0.0089 0.0019 20.0006 20.0256 20.0043 20.0004 0.0947
(0.32) (0.04) (20.01) (20.60) (20.06) (20.08) (0.93)
Adjusted R2 0.9760 0.6056 0.6132 0.7256 0.2845 0.9605 0.4928
Adjusted R2 without 0.2314 0.1641 0.1153 0.2510 0.1716 0.0498 0.0916
lagged ownership
variables
Durbin–Wu –Hausman 0.6706 0.3107 0.4430 0.3367 0.3752 0.7657 0.9744
p-value

p , 0.1; p , 0.05; p , 0.01.
Log_Ins_own, Log_Herfindahl, Log_Largest_sh, Log_Bank_own, Log_Inst_own, Log_Gov_own and Log_Firm_own are, respectively, the natural logarithms of
Ins_own, Herfindahl, Largest_sh, Bank_own, Inst_own, Gov_own and Firm_own; Margin is the ratio of ordinary income over sales; Log_assets is the natural
logarithm of total assets; Asset_growth is the growth rate of total assets; Q represents Tobin’s Q; Volatility is the standard deviation of a firm’s operating profit
scaled by total assets for the previous five years; Leverage is the ratio of total book debt to total capital, where equity is measured using its market value; Cash
flow over assets is the ratio cash flow/assets.
All models are estimated with t-statistics based on White robust standard errors and include time and industry dummies.
Table 8. 2SLS regressions of the cost of debt

2LS 2LS

Intercept 0.1253 0.1238
(3.15) (3.18)
PredIns_own 20.0660 20.0652
(24.43) (24.30)
PredHerfindahl 20.0149
(20.34)
PredLargest_sh 20.0092
(20.25)
PredBank_own 20.1024 20.1009
(22.42) (22.38)
PredInstit_own 0.0129 0.0163
(0.17) (0.21)
PredGov_own 20.1169 20.1152

(21.56) (21.49)
PredFirm_own 0.0451 0.0463
(1.53) (1.57)
PredLog_assets 0.0019 0.0018
(0.85) (0.79)
Int_cov 20.0007 20.0007
(21.93) (21.96)
Collateral 20.0922 20.0917
(23.30) (23.26)
Current 20.0042 20.0042
(21.05) (21.04)
Intang 0.1063 0.1076
(1.07) (1.09)
Q 20.0011 20.0011
(20.72) (20.68)
Volatility 20.0002 20.0002
(20.70) (20.70)
Asset_growth 20.0365 20.0364
(22.79) (22.79)
Margin 0.0705 0.0688
(1.71) (1.65)
Leverage 20.0153 20.0148
(20.72) (20.70)
Public_debt 0.0031 0.0031
(0.28) (0.28)
Adjusted R2 0.3826 0.3824

p , 0.1; p , 0.05; p , 0.01.
PredIns_own, PredHerfindahl, PredLargest_sh, PredBank_own, PredInst_own, PredGov_own and
PredFirm_own are the predicted values in the first stage of the log of the corresponding ownership
structure variables.
Int_cov is the ratio of operating profit over interest expense for the period; Collateral is the ratio of net
property, plant and equipment over total assets; Current is the ratio of current assets over current
liabilities; Intang is the ratio of the level of intangibles recognised in the balance sheet over total
assets; Tobin’s Q is calculated as the sum of market capitalisation plus long- and short-term debt
over the book value of total assets; Volatility is the standard deviation of a firm’s operating profit
scaled by total assets for the previous five years; Asset_growth is the growth rate of total assets;
Margin is the ratio of ordinary income over sales; Leverage is the ratio of total book debt to total
capital, where equity is measured using its market value; Public_debt is a dummy variable that
takes a value of 1 if the firm issues public debt, and 0 otherwise.
All models are estimated with t-statistics based on White robust standard errors and include time and
industry dummies.
along the sample and also whether the effect of insider ownership on the
cost of debt is moderated by bank ownership. To carry out this analysis, we
calculate percentiles 25 and 75 for the ownership structure variables and define
dummies of high (low) ownership that, respectively, take a value of one when
the ownership structure variable is above (below) the 75th (25th) percentile.
We propose nine models similar to the two below to test these interactions and
non-linearities:5
Cost of debtit ¼ b0 þ b1 Ins_ownit þ b2 Herfindahlit

þ ðb3 þ b4 Dhighinsowit ÞBank_ownit þ b5 Instit_ownit
þ b6 Gov_ownit þ b7 Firm_ownit þ b8 Log_assetsit þ b9 Int_covit
þ b10 Collateralit þ b11 Currentit þ b12 Intangit þ b13 Qit

þ b14 Volatilityit þ b15 Leverageit þ b16 Public_debtit
X X
þ ðbt Time_Dumt Þ þ ðbj Ind_Dumj Þ þ 1it ð3Þ
t j
Cost of debtit ¼ b0 þ b1 Ins_ownit þ b2 Herfindahlit

þ ðb3 þ b4 Dlowinsowit ÞBank_ownit þ b5 Instit_ownit
þ b6 Gov_ownit þ b7 Firm_ownit þ b8 Log_assetsit
þ b9 Int_covit þ b10 Collateralit þ b11 Currentit þ b12 Intangit
þ b13 Qit þ b14 Volatilityit þ b15 Leverageit þ b16 Public_debtit
X X
þ ðbt Time_Dumt Þ þ ðbj Ind_Dumj Þ þ 1it ð4Þ
t j
where Dhighinsow is a dummy variable that takes a value of one when Ins_own is
above percentile 75, and zero otherwise, whereas Dlowinsow takes a value of one
when Ins_own is below percentile 25, and zero otherwise.
The results of these models (untabulated) show that interactions between
insider ownership and bank ownership, and non-linearities in ownership variables
with the exception of insider ownership, are non-significant. Specifically, in
the model where we test non-linearities in insider ownership, we find that the
coefficient for the interaction between insider ownership and the dummy variable
for high insider ownership is positive and significant at 10%, and that the
F-statistic for the linear restriction test under the null hypothesis of non-
significance (b1 þ b2 ¼ 0) is significant at 1%. This means that the effect
(slope) of insider ownership on the cost of debt is higher for insider ownership
levels below 0.3353 (slope of 20.0950) than for levels higher than 0.3353
(slope of 20.0950 þ 0.0486 ¼ 20.0464), that is, insider ownership reduces
the cost of debt all along the sample, but this reduction is more effective
when insider ownership is below 33.5%. In all these models the coefficients
and the significance of the rest of the variables are quite similar to those shown
in Table 6.
5.2. Deviation from Optimal Ownership

In this section we extend the test of the transaction cost theory (Core and Larcker,
2002), which tries to reconcile the exogeneity and endogeneity perspectives of
the association between insider ownership and firm value, to the associations
between ownership structure mechanisms and the cost of debt. Thus, in accord-
ance with Core and Guay (1999), we obtain the residuals of the first stage
regressions in Table 7, which measure deviations from the optimum values of
ownership structure. Positive (negative) residuals indicate that actual values of
ownership structure are above (below) their optimal values. Following Core
and Guay (1999) and Tong (2008), we study the effect of these deviations on
the cost of debt (Table 9). Column 1 shows the effect of absolute deviations
(absolute value of residuals) on the cost of debt and column 2 assesses whether
deviations on either side of optimal ownership structure influence the cost of debt.
Table 9 presents the findings of the regressions, which show that deviations
from the estimated optimum do not affect the cost of debt. In general, these
non-significant results do not confirm the transaction cost theory of the relation-
ship between managerial ownership and the cost of debt.6 There may be at least
two reasons for this pattern. First, the existence of an optimal degree of manage-
rial ownership that maximises firm value may not imply that deviations from this
optimum definitely increase the cost of debt. We test this proposition (results not
reported) and do not find significant results at conventional levels. Second, in
contrast with the more flexible Anglo-Saxon markets, ownership structure in
Spain does not change much from year to year, which suggests that deviations
from the estimated optimal levels are small and, as a consequence, the effect
on the cost of debt and firm value is not significant.
5.3. Agency Costs and Ownership Structure

We check the robustness of our results by using as dependent variables two
measures of agency costs that have been employed in previous studies, and
assess the effect of ownership structure on both. The first agency cost measure
is operating expenses over annual sales (Operating expenses) (Ang et al.,
2000; Singh and Davidson, 2003). This measure captures excessive expenses,
including perk consumption, and measures managers’ inefficiency in controlling
operating costs. Higher values of this ratio represent higher agency costs. The
second is the asset liquidity ratio (Cash/assets), which is defined as the sum of
cash and marketable securities scaled by total assets (Prowse, 1990). The
larger the proportion of total firm assets that are held in liquid form, the
greater are management discretion and the likelihood that some or all of these
funds may be invested sub-optimally. Thus, firms with higher asset liquidity
Table 9. Regressions of cost of debt on residuals of ownership structure and control

variables
Cost of debt

Intercept 0.1002 0.1005
(2.65) (2.57)
r_Ins_own 0.0897 0.2200
(0.73) (0.88)
r_Ins_own D1above 20.1378
(20.58)
r_Herfindahl 0.0614 20.0860
(1.24) (20.99)
r_Herfindahl D2above 0.1421
(1.72)
r_Bank_own 20.0132 20.0147

(20.20) (20.15)
r_Bank_own D3above 0.0196
(0.19)
r_Instit_own 0.0148 0.0931
(0.38) (1.03)
r_Instit_own D4above 20.0749
(20.94)
r_Gov_own 0.1501 0.1826
(0.32) (0.35)
r_Gov_own D5above 0.4792
(0.67)
r_Firm_own 20.0461 20.0649
(21.45) (21.69)
r_Firm_own D6above 0.0348
(0.89)
Log_assets 0.0022 0.0018
(1.05) (0.85)
Int_cov 20.0004 20.0004
(21.01) (21.13)
Collateral 20.1038 20.1039
(23.46) (23.49)
Current 20.0070 20.0075
(21.85) (21.91)
Intang 0.1516 0.1438
(1.42) (1.32)
Q 20.0009 20.0009
(20.53) (20.53)
Volatility 20.3e204 20.3e205
(20.09) (20.01)
Asset_growth 20.0374 20.0357
(22.86) (22.72)
Margin 0.0516 0.0549
(1.13) (1.21)
(Continued)
Table 9. Continued
Cost of debt
Leverage 0.0033 0.0041
(0.17) (0.20)
Public_debt 0.0037 0.0056
(0.37) (0.53)
F2 1.34
F3 0.65
Adjusted R2 0.3297 0.3543

p , 0.1; p , 0.05; p , 0.01.
F2 and F3 are F-statistics that test the null hypothesis that the linear restriction has no significance.
Cost of debt is the interest expense for the year divided by the interest-bearing debt; r_Ins_own,
r_Herfindahl, r_Bank_own, r_Instit_own, r_Gov_own and r_Firm_own are, respectively, the absolute
values of the residuals in the ownership structure regressions in the first stage; D1above, D2above,
. . ., D6above are, respectively, dummy variables that take a value one of 1 for positive residuals and
0 otherwise in the regressions of the respective ownership variables. Log_assets is the natural
logarithm of total assets; Int_cov is the ratio of operating profit over interest expense for the period;
Collateral is the ratio of net property, plant and equipment over total assets; Current is the ratio of
current assets over current liabilities; Intang is the ratio of the level of intangibles recognised in the
balance sheet over total assets; Tobin’s Q is calculated as the sum of market capitalisation plus long-
and short-term debt over the book value of total assets; Volatility is the standard deviation of a firm’s
operating profit scaled by total assets for the previous five years; Asset_growth is the growth rate of
total assets; Margin is the ratio of ordinary income over sales; Leverage is the ratio of total book
debt to total capital, where equity is measured using its market value; Public_debt is a dummy
variable that takes a value of 1 if the firm issues public debt, and 0 otherwise.
industry dummies.
ratios are likely to be subject to greater agency costs:
Agency measureit ¼ b0 þ b1 ðIns_ownit Þ þ b2 ðOwnership concentrationit Þ

þ b3 ðBank_ownit Þ þ b4 ðInstit_ownit Þ þ b5 ðGov_ownit Þ
þ b6 ðFirm_ownit Þ þ b7 ðLog_assetsit Þ þ b8 ðAsset_growthit Þ
X X
þ b9 ðLeverageit Þ þ ðbt Time_Dumt Þ þ ðbj Ind_Dumj Þ
t j
þ 1it : (5)
Table 10 shows that, in general, agency costs decrease as the equity shares of
managers and banks increase (insider ownership is significant in the operating
expenses model and bank ownership in the cash/assets model – both at 5%
and with negative signs). There is some evidence (cash/assets model, p ,
10%) that government ownership and institutional ownership could help
reduce agency costs, but – confirming previous results – firm ownership and
equity concentration are not significant.
Table 10. Agency costs and ownership structure

Operating expenses/sales Cash/assets
Intercept 1.312 0.1130
(11.72) (2.71)
Ins_own 20.0767 20.0215
(22.54) (21.27)
Herfindahl 20.1750 20.0259
(21.60) (20.77)
Bank_own 20.0301 20.1008
(20.40) (22.04)
Instit_own 20.0002 20.0008
(20.34) (21.76)
Gov_own 20.0023 20.0012
(21.57) (21.69)
Firm_own 20.5e204 20.0003
(20.13) (21.45)
Log_assets 20.0284 20.0007
(24.78) (20.26)
Asset_growth 0.0055 20.0025
(0.68) (20.38)
Leverage 0.0622 20.0216
(0.92) (20.85)
Adjusted R2 0.1787 0.0825

p , 0.1; p , 0.05; p , 0.01.
Herfindahl is the Herfindahl index for ownership concentration; Ins_own is the proportion of common
shares held by members of the board of directors; Bank_own is the proportion of common shares held
by banks; Instit_own is the proportion of common shares held by institutions; Gov_own is the
proportion of shares held by the state; Firm_own is the proportion of common shares held by other
companies that are significant shareholders (5%); Log_assets is the natural logarithm of total
assets; Asset_growth is the growth rate of total assets; Leverage is the ratio of total book debt to
total capital, where equity is measured using its market value.
industry dummies.
6. Concluding Remarks
Over the years there has been a considerable literature on the relationship
between ownership structure and performance. By shifting the focus from per-
formance to the cost of debt, this study offers new insights into an institutional
context that differs greatly from those of the countries considered in previous
literature (particularly the US system).
The evidence suggests that in Spain the privileged position of banks contrib-
utes to a reduction in the agency cost of debt financing when banks are significant
equity holders and thus can monitor management activities. Similarly, and in
agreement with agency theory, high insider ownership implies an alignment of
interests between board of directors and shareholders, which decreases opportu-
nistic behaviour by managers, reduces creditors’ perception of likelihood of
default in loan repayments and thus lowers the cost of debt even in the presence
of bank monitoring. Firms with state ownership may benefit from easier financing
conditions through the state financial agency attached to the Ministerio de
Economı́a y Hacienda. From the creditors’ perspective, partial ownership by
banks, by the state or by the board of directors protects their interests.
On the other hand, our results do not confirm the transaction cost theory of
the relationship between ownership structure and cost of debt, probably
because of the stability in ownership structure of Spanish firms. Further research
might examine whether transaction cost theory may be extended to other financial
variables, apart from firm value, and to ownership structure attributes other than
those considered here.
Our findings, together with other studies addressing what factors influence the
cost of debt financing and what factors shape the effectiveness of different
corporate governance mechanisms, may provide valuable input for the work of
committees such as the OECD Council and the Commission of the European
Communities, which are requesting continued analytical work to ascertain the
credit implications of governance mechanisms. The evidence is also important
to credit agencies, which are concerned with governance because weak firm gov-
ernance may impair a firm’s financial position and leave debtholders vulnerable
to losses. In addition, this field of research will provide investors with a more
refined sense of how companies’ cost of debt might be affected by their owner-
ship composition.
Acknowledgements
We would like to thank an anonymous referee and the editor for the helpful
comments and suggestions received during the review process. We also thank
the Research Agency of the Spanish Government for financial support (Project
SEJ2007-61450/ECON) and AECA for its support to young researchers.
Notes
1
A limitation of this measure is that it does not take into account the market value of debt, but as
we explain in the following paragraphs, the main source of financing in Spain is bank debt, and
only some firms of the sample have their debt in the form of bonds traded in the market. The
numerator of the ratio also includes the capitalisation of interest. Spanish GAAP do not allow
the use of the direct method for capitalisation of interest. Borrowing costs are first recognised
as expenses; when specific conditions are met, they can be capitalised.
2
According to a recent study for the European Commission, pyramid structures and voting-right
ceilings are mechanisms of voting restrictions in only some large Spanish companies (87% had
no control-enhancing mechanism or only one). Crespı́-Cladera and Garcı́a-Cestona (1998)
found, on average, 20.69% of voting rights, just 1% above the cash flow rights. Moreover,
Leech and Manjón (2002) showed that in Spain ownership control is dominant, noting that
all the measures of the five largest shareholders that they employ indicate control in almost
every case.
3
Since there are no problems of collinearity, we have included all the different characteristics of
ownership structure in the same model.
4
We thank Mitchell A. Petersen for making available the Stata command cluster2 from his
website. Repeating the analyses of the rest of the tables with two-way clustering would give
results similar to those reported.
5
We propose another seven models (untabulated) similar to models 3 and 4 to test interactions
between insider ownership and bank ownership, and non-linearities in insider ownership, bank
ownership, institutional ownership, ownership concentration and company ownership. In
Gov_own we do not test non-linearities and interactions, since just 7.7% of the sample takes
values higher than zero.
6
The results do not change if ownership structure variables are considered at t21.
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On: 26 October 2014, At: 22:39

European Accounting Review

Ownership Structure and the

To link to this article: http://dx.doi.org/10.1080/09638180903487834

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Ownership Structure and the Cost

JUAN PEDRO SÁNCHEZ-BALLESTA and

(Received: May 2007; accepted November 2009)

Correspondence Address: Juan Pedro Sánchez-Ballesta, Accounting Department, Facultad de

0963-8180 Print/1468-4497 Online/11/020389–28 # 2011 European Accounting Association

that research to a sample of listed Spanish firms. Corporate governance mechan-

degree of ownership concentration and shareholder identity. Finally, we test the

2. Previous Literature and Development of Hypotheses

The potential conflicts of interest between managers, shareholders and debtholders

We hypothesise that ownership structure may promote effective decision-

2.1. Ownership Concentration

H1: Ownership concentration is related to the cost of debt.

2.2. Bank Ownership

shareholders of most listed firms. In civil-law countries, such as Spain, financial

H2: Bank ownership is associated with the cost of debt.

2.3. Insider Ownership

H3: Insider ownership is associated with the cost of debt.

2.4. Other Types of Shareholders: Institutions, Government and

H4a: Institutional ownership is associated with the cost of debt.

H4b: Government ownership is associated with the cost of debt.

Spain is different from other developed countries in the prevalence of inter-

so we analyse whether ownership by non-financial corporations influences the

H4c: Non-financial firm ownership is related to the cost of debt.

3.2. Measuring the Cost of Debt and Ownership Structure

organisations: insurance companies, pension funds, investment trusts, financial

3.3. Control Variables

(Asset_growth), calculated as the growth rate of total assets, and margin

3.4. Descriptive Statistics

Table 1. Descriptive statistics

Table 2. Sample distribution by industry

Table 4. Cost of debt by industry – Kruskal– Wallis test

Table 4 provides descriptive statistics of the cost of debt by industry and a

Cost of debtit ¼ b0 þ b1ðIns_ownit Þ þ b2 ðOwnership concentrationit Þ

Table 5. Sample composition between bank debt and public debt

Table 6. Regressions of cost of debt on ownership structure and control variables

Intercept 0.1141 0.1160 0.1150 0.1168

Firm_own 0.0162 0.0161 0.0169 0.0171

Log_Ownership structure variableit ¼

where Log_Ownership structure variable equals the log of (1 þ Ownership

Ownership Structure and the Cost of Debt

J. P. Sánchez-Ballesta and E. Garcı́a-Meca

Table 8. 2SLS regressions of the cost of debt

PredGov_own 20.1169 20.1152

Cost of debtit ¼ b0 þ b1 Ins_ownit þ b2 Herfindahlit

þ b10 Collateralit þ b11 Currentit þ b12 Intangit þ b13 Qit

Cost of debtit ¼ b0 þ b1 Ins_ownit þ b2 Herfindahlit

5.2. Deviation from Optimal Ownership

5.3. Agency Costs and Ownership Structure

Table 9. Regressions of cost of debt on residuals of ownership structure and control

r_Bank_own 20.0132 20.0147

ratios are likely to be subject to greater agency costs:

Agency measureit ¼ b0 þ b1 ðIns_ownit Þ þ b2 ðOwnership concentrationit Þ

Table 10. Agency costs and ownership structure

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