Institutional blockholder ownership and capital structure

of US public firms

Group 8.5
I. van Dunschoten (2677368)
T.S. Jak (2669766)
D.S. Worp (2672947)
Vrije Universiteit Amsterdam
School of Business and Economics
Finance specialization Financial Management
Supervisor: Assistant Professor Xingchen Zhu
January 27, 2023
 Abstract

This paper examines the relationship between blockholder ownership and the leverage ratio
of firms, where also a distinction is made between long-term and short-term leverage ratio.
Already existing literature mostly conducts their research in emerging markets. The findings
differ a lot as some papers find that blockholders monitor their firms to align the interests of
them and the managers and find a negative relationship. Other papers find that only
monitoring is not enough and that blockholders use debt as another monitoring function and
therefore find a positive relationship. The study extends the existing literature by using a
large sample for US firms and by reviewing the difference between the relationship of
blockholder ownership on short-term and long-term leverage. A sample of 6,154 US firms
have been studied. The results show a significant negative relationship between blockholder
ownership and short-term leverage ratio. The other results were not significant. This shows
the importance of conducting research on this topic.

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Table of Contents
1. Introduction 3
2. Literature review 5
2.1 Definition of blockholders 5
2.2 Blockholder ownership and capital structure 6
2.2.1 Positive effect 7
2.2.2 Negative effect 8
2.2.3 Insignificant effect 9
2.2.4 No effect 9
2.3 Relation to prior research 10
2.4 Hypotheses 11
3. Data and methodology 14
3.1 Data sample 14
3.2 Dependent variables 14
3.3 Independent variables 16
3.4 Control variables 16
3.5 Models 19
3.6 Threats to validity 20
4. Results 21
4.1 Descriptive statistics 21
4.2 Correlation matrix 22
4.3 Regression results 23
4.3.1 Total debt and blockholder ownership 23
4.3.2 Long-term debt and blockholder ownership 24
4.3.3 Short-term debt and blockholder ownership 24
4.4 Robustness check 25
5. Discussion and conclusion 27
5.1 Discussion 27
5.2 Implications 29
5.3 Conclusion 29
5.4 Limitations 30
5.5 Future research 30
References 32
Appendices 36

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1. Introduction
The relationship between blockholder ownership and capital structure is an important and
widely researched topic in corporate finance, as it has implications for firms' risk and return
trade-offs as well as for investors, creditors, and other stakeholders. However, there are still
many unanswered questions and open debates in this field.

One reason to conduct further research on this topic is that the relationship between
blockholder ownership and capital structure is not well understood. While some studies have
found a negative relationship between blockholder ownership and leverage (meaning firms
with high levels of blockholder ownership tend to have lower levels of debt relative to
equity), other studies have found no relationship or even a positive relationship. Additionally,
the relationship may vary depending on a firm's characteristics, such as its industry or growth
opportunities, or the institutional and legal characteristics of the country. Therefore,
conducting more research on this topic would help to better understand the factors that
influence the relationship between blockholder ownership and capital structure.

Another reason to conduct further research on this topic is that the relationship between
blockholder ownership and capital structure may have important implications for firm
performance. For example, firms with high levels of blockholder ownership may be less
likely to make suboptimal investment decisions or take on excessive debt, resulting in better
financial performance. Additionally, understanding how blockholder ownership affects a
firm's capital structure can also be valuable for investors and creditors in making more
informed decisions.

Moreover, the context of the study is also important for considering further research, as laws
and regulations regarding corporate governance, ownership structure, and debt markets may
have different implications for different countries or regions. Conducting research in different
locations and countries could provide additional insights on the relationship between
blockholder ownership and capital structure, and how these relationships may vary across
different institutional settings.

In summary, conducting further research on the relationship between blockholder ownership

and capital structure would deepen the understanding of how this relationship varies across

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different settings and industries, and the potential implications for firm performance and the
decisions of investors and creditors. This line of research is essential for policymakers,
academics, and practitioners to make better-informed decisions and provide better solutions
for the capital structure of firms. This particular research paper will add to the existing
literature by determining whether or not any effect between blockholder ownership and firm’s
capital structure is visible in the period 2001 to 2015, using blockholder data from
institutional 13-F holdings. The gap that will be filled with this research thus is the gap in
information on the relationship of blockholders on 6,154 US firm’s capital structure in the
period of 2001 to 2015. The research question that is being examined in this study should
thus be:

“Does institutional blockholder ownership have a statistically significant effect on the capital
structure of US public firms?”

Furthermore, the following sub-question will be examined to conclude whether there is a

difference between the relationship between blockholder ownership and long-term debt and
the relationship between blockholder ownership and short-term debt:

“Does institutional blockholder ownership have a different effect on the long-term capital
structure as opposed to the short-term capital structure of US public firms?”

The paper starts with a review of relevant existing literature. Within this literature review the
characteristics of blockholders will be reviewed as well as existing literature on the
relationship between blockholder ownership and the amount of leverage firms tend to have.
Finally, based on previously conducted research and the research questions of this study,
hypotheses will be formed within this chapter. After the literature review, the data and
methodology chapter follows. This chapter gives an elaborate overview of the data and the
methodology that have been used to obtain the results of the study and thus to conduct the
research. The chapter hereafter will reveal the results of the conducted research. Within this
research, the results will be outcomes of multiple OLS regressions. Also in this chapter, the
earlier formulated hypotheses will be reviewed and discussed. The final section of the paper
will entail the discussion and the conclusion. Within this chapter an answer on the research
question will be formulated and conclusions based on the results of the study will be drawn.
Besides this, the findings will also be discussed as well as the limitations and implications of
the conducted research. Finally, suggestions for future research in this field will be given.

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2. Literature review
This section, about the existing academic literature of blockholders and its effect on firms’
capital structure, is divided into three different sections. The first section gives a broad view
on the existing academic literature about the definition of blockholders and its functions. The
second section gives an overview of the relevant academic literature on the effect of
blockholder ownership on the degree of how leveraged a firm is. The third part relates the
The fourth and final section of the literature review consists of the hypothesis of this research
paper.

2.1 Definition of blockholders

To do research on the influence of blockholders on the capital structure of firms it is
important to first establish the definition of blockholders. Under US regulations every
investor, whether it is an individual or an institution, needs to give notice to the SEC
whenever they hold a 5% or larger stake in a publicly listed company. This 5% or larger stake
is called a block and the owner of this block is the blockholder. Holderness (2007) found that
blockholders exist in 96% of the US publicly traded firms at that time.

One of the features of publicly traded firms is that they share their (part of) the company to
the public. Some advantages of being public are that it is easier to attract capital, it gives
current shareholders a chance to diversify, it will make the company more well known and
many more. On the other hand there are also some disadvantages like: having to report
according to specific requirements and a loss of control. Another effect of being publicly
traded is that the firm can be in the hands of anyone and that it is nearly impossible to track
every single shareholder. This may lead to a separation from ownership and control. This is
where the agent-principal relationship arises, which may lead to agency problems. Fratini and
Tettamanzi (2015) define agency problems as when managers in the company have different
interests than the owners of the shares.

Blockholders can intervene in the company’s corporate governance in two ways: voice and
exit (Edmans, 2014). By using voice, blockholders directly intervene in the firm’s operations.
This can be done by proposing a certain strategy during a shareholder meeting, sending a
letter to the company or through voting against certain directors that differ from their ideas
during a shareholder vote. Voice is a subtle way to intervene in the company. The other way

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for blockholders to have influence in the corporate governance is by exit. Here the
blockholder sells shares to thereby lower the share price. This often starts with threatening to
exit, this will foster the manager to maximize the firm's value. Exit is thereby a harder way of
getting managers to act in the way the blockholder wants.

Threatening to exit is a way to intervene in a company. The blockholder owns a lot of shares
in the company and by selling those shares will have a great negative impact on the price of
the stock. A reason for selling shares is the underperformance of managers. To prevent
blockholders from selling their shares and thereby decreasing the value of the firm, managers
will listen better to their shareholders, so the threat of exit will go down. Dou et al. found that
when a threat of exit increases companies have higher quality of financial reporting and that
this effect is even greater when the managers bonuses rely on the stock price of the company
(2018). This makes sense as managers the threat of exiting rises when there is a low quality
of financial reporting and selling the shares will cause a lower share price. So by keeping the
quality of financial reporting high, the threat of exit will be lower and the share price, and
thus the bonus of the manager, will stay higher.

Besides the positive effect that blokholders have on agency problems and the other
advantages of blockholders, there are also some disadvantages. Burkart, Gromb & Panunzi
(1997) argue that ex-post intervention from blockholders is desirable, because this will ensure
that the project that maximizes firm value has been chosen. In contrast, ex-ante intervention
may reduce firm value, as managers will be less motivated to find value creating projects,
because they are worried that the blockholder will not approve it. In addition, blockholders
have a large part of their money at stake at the firm and are therefore less diversified than
other shareholders. Due to the riskier investment, blockholders are reluctant on investments,
which are risky but value creating (Dhillon & Rossetto, 2014). Another disadvantage of
blockholders for the other shareholders is the decrease in liquidity (Bolton & Von Thadden,
1998). If the blockholder is larger, then there are fewer shares left on the market, which
decreases the liquidity of the market.

2.2 Blockholder ownership and capital structure

The literature on the effect of blockholder ownership on firms' capital structure is extensive,
with a range of findings reported. Blockholder ownership, defined as large shareholders who

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own significant portions of a firm's equity (> 5%), can have a significant effect on a firm's
capital structure. The literature in this area has examined the relationship between
blockholder ownership and a firm's debt-to-equity ratio, with some studies finding a positive
effect, others finding a negative effect, and still others finding no significant effect or no
effect at all. This literature review will examine the findings of several studies that have
investigated the effect of blockholder ownership on a firm's capital structure.

2.2.1 Positive effect

First, a couple of research papers which found a positive effect of blockholder ownership on a
firm's capital structure will be reviewed, the first one being a paper of Brailsford, Oliver and
Pua (2002). The researchers observed a, as they acknowledged themselves, relatively small
sample of 49 firms which are listed on the Australian Stock Exchange over the period 1989 to
1995. This paper laid the foundation for further research in this field, hence it is one of the
most, if not the most, cited article in this field of research. However, considering the sample
is relatively small, only focused on Australian firms and the data is quite dated, results may
vary if the same research is done at a different point in time with a different sample. An
example of a research paper which took inspiration from the paper of Brailsford et al was the
paper of Tran (2020), which also found a positive effect of blockholder ownership on a firm's
level of leverage. Tran observed 137 DAX firms over the period of 2013 to 2018.

Another research paper which also found a positive effect was the paper of Grossman and
Hart (1982). This article examines the relationship between corporate financial structure and
managerial incentives. The authors argue that the presence of blockholders can provide an
important monitoring mechanism to align the interests of managers and shareholders. They
suggest that blockholders can be a deterrent against agency problems, as they can monitor
managers and prevent them from expropriating value from shareholders.

Chen, Huang, Chang & Wang (2013) also wrote a research paper which found a positive
effect of blockholder ownership on a firm's level of leverage. They observed 711 Taiwanese
companies over the period of 1990 to 2011. With the help of a regression analysis the
researchers concluded that blockholder ownership is related positively with the firm's capital
structure. In this research the researchers also conclude that this positive relationship is

7
accruable to the monitoring role blockholders provide. However, this paper focuses solely on
Taiwanese companies, meaning results may differ for different countries.

Besides the aforementioned papers, there are more papers which found a positive correlation
between blockholder ownership and leverage. Forsberg (2004) conducted research on 142 US
firms for the years 1990 to 1996 and found a positive effect of blockholder ownership on
firm’s leverage. Mehran (1992) observed 124 manufacturing firms during 1979 to 1980,
finding a positive relationship between the leverage ratio of the firms and the percentage of
equity owned by large individual investors. Shoaib and Yasushi (2016) observed 186
non-financial Pakistani companies, also finding positive correlation. Sheik and Wang (2012)
also observed Pakistani firms, however they observed 155 firms over the period of 2004 to
2008, also finding a positive effect. Abor and Biepke (2006) observed 68 listed
South-African SMEs over five years, 2000 to 2004, finding a significant association between
number of blockholders and capital structure.

Finally, Hayat, Yu, Wang and Jebran (2018) researched developed US companies (183) and
developing Chinese companies (92) over the period of 2009 to 2016, finding positive
correlation for the US firms and negative correlation for the Chinese firms. Almost all of the
researchers attribute the positive effect to the monitoring function that the blockholders
fulfill. However, these research papers all focus on a specific set of companies, some of them
observe a relatively small period and some of them use relatively dated data. This means that
the results are not generalizable and may vary if the same research would be repeated.

2.2.2 Negative effect

Besides positive effects, research papers which found negative effects between the amount of
leverage a firm has and blockholder ownership will be reviewed. The first research paper
which found a negative effect between blockholders and leverage which will be reviewed is
written by Bui (2020). The research took data from 653 US firms over the period of 1989 to
2009 and concluded that blockholder ownership has a negative effect on the leverage of the
observed firms. However, the data used in this research is rather dated, meaning the
conclusion of this paper may also be dated.

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Santos, Moreira and Vieira (2014) analyzed the effect of blockholders on a firm's capital
structure in Western Europe. Over the period 2002 to 2006 they observed 694 Western
European firms in order to establish an effect. According to their findings they conclude that
a negative relationship between the observed firm’s capital structure and ownership
concentration exists. For this research only Western European firms have been observed over
a relatively small period of time, meaning the results may differ for different samples over a
larger time period.

Lastly, the paper of Lundstrum (2009) will be reviewed. Lundstrum observed 999 bond and
stock issuances from the AMEX, NYSE and NASD over the period of 1989 to 1993. Based
on his observations, Lundstrum concluded that a firm’s ownership structure has an impact on
the extent to which firms reduce their leverage. However, this paper uses data which is rather
dated, meaning results may vary if the same research is done in this day and age.

2.2.3 Insignificant effect

During the literature review, an interesting research paper written by Hussein, Sakr and Barie
(2019) was found. This research paper observed the top 50 companies listed on the Egyptian
Stock Exchange in the period of 2012 to 2017. Hussein, Sakr and Barie concluded that there
is no significant effect of blockholder ownership on a firm's capital structure due to the fact
that their found P-value for the observed correlation was higher than 0.05. Besides this
finding, Hussein, Sakr and Barie also found that blockholder ownership has no significant
effect on short-term and long-term debt. This research however solely focuses on Egyptian
firms, meaning the results may vary if the same research was conducted on companies which
are based in a different country.

2.2.4 No effect
Lastly, during the search for existing literature, a research paper which found no effect at all
between blockholder ownership and the firm's capital structure surfaced. Margaritis and
Psillaki (2010) conducted research in order to establish an effect between ownership structure
and capital structure, observing French manufacturing firms. Margaritis and Psillaki conclude
that, according to their findings, more concentrated ownership will generally be associated
with more leverage. Though, they also conclude that generally ownership type has no effect
on the amount of leverage of firms. However, this research has been conducted over a period

9
of 4 years and solely observed French firms, meaning results may vary if a longer horizon
and different firms would have been observed.

For a graphic overview of all the reviewed research papers and their found effects of
blockholder ownership on the level of leverage firms have, see table 1 in appendix A.

2.3 Relation to prior research

After sifting through a carefully compiled list of relevant literature, the relation between the
prior conducted research and this research will be communicated. One thing which was
discovered during the literature review was that a significant portion of the papers conducted
research on a relatively small sample. Based on this information the decision was made to
make this research paper more generalizable, which is why our research includes a sample of
6,154 US firms. This sample is bigger than any of the reviewed research papers, making this
research more generalizable than other research papers in this field.

Secondly, by reviewing prior research, it came to the attention that most of the prior research
in this field conducted research on firms over a relatively small period of time. Santos,
Moreira and Vieira (2014) for example, conducted research over the years 2002 to 2006. An
even smaller window of time was observed by Margaritis and Psillaki (2010), they observed
firms over only 4 years. The smallest window observed was by Mehran (1992), observing
only in 1979 and 1980. A smaller window of time means less generalizability, which is why
this research decides to follow research papers like the ones from Bui (2020) and Chen,
Huang, Chang and Wang (2013), which observed the periods 1989 to 2009 and 1990 to 2011
respectively. These papers gave the insight to take a relatively longer time period, which is
why this research paper observes from 2001 to 2015.

Besides the sample size and the time window, the years in which the data was gathered has
also been given thought. Generally, the more dated the data is, the less usable it will be as of
today. Brailsford, Oliver and Pua (2002) for example conducted research with data from 1989
to 1995, which could be seen as quite outdated. The same goes for the research paper of
Fosberg (2004), which observed data from 1990 to 1996. Also Mehran (1992) observed
relatively old data. Hussein, Sakr and Barie (2019) however observed firms over the period of
2012 to 2017, which is way more up to date than data from the 90’s. Hence it was decided to

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observe a relatively large, but also relatively recent, time window, which in this case is the
time window from 2001 to 2015.

When it comes to structuring the research, existing literature has also played an important
role. Considering that the research paper from Brailsford, Oliver and Pua (2002) is one of the
most cited articles in this field of research, inspiration was taken from this paper. The way
this paper structures its regression model is based on the paper of Brailsford et al. (2002), but
it is not the only paper where inspiration was taken from. Also the research paper of Tran
(2020) played a rather big role by forming this research. For example, both studies use
standard errors in their research on the relationship between blockholders and leverage,
which is why this research paper also incorporates them.

2.4 Hypotheses
In order to formulate an answer on the earlier stated research questions, hypotheses have to
be made which can be accepted or rejected. Research papers like the ones from Bui (2020),
Santos, Moreira and Vieira (2014) and Lundstrum (2009) found a negative effect of
blockholder ownership on a firm's level of leverage. This is attributed to the fact that
blockholders have a monitoring function, which eliminates the need of debt in order to keep
manager’s misuse of interests in check. So, based on these papers, the following hypothesis
can be formulated:

H10: There is a negative relationship between blockholder ownership and a firm's leverage
ratio.

However, research papers like the ones of Brailsford, Oliver and Pua (2002), Tran (2020) and
Mehran (1992) on the other hand found a positive relationship between blockholder
ownership and the amount of leverage firms take on. This is attributed to the fact that
sometimes the monitoring function of blockholders might not be enough to align the interests
of managers and shareholders which is why debt needs to be taken on. So, based on these
papers, an alternative hypothesis has been formulated:

H1a: There is a positive relationship between blockholder ownership and a firm's leverage
ratio.

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Besides the formulated research question, a sub-question has been formulated in order to get
more information out of the raw data. The earlier stated sub-question leads to the formulation
of three different sets of hypotheses. The first hypothesis which is formulated based on the
belief that there is a substitution relationship between blockholder ownership and long-term
debt. It is believed that long-term debt and blockholders both fulfill a monitoring function,
meaning that long-term debt is no longer a necessary instrument to align managers interests
with the interests of shareholders once one or more blockholders enter the firm. This
indicates that there is a negative relationship between blockholder ownership and the amount
of long-term debt firms take on, which is why the following hypothesis is formed:

H20: There is a negative relationship between blockholder ownership and a firm's long-term
leverage ratio.

Andriani and Patrisia (2022) however concluded that firms with blockholders have easier
access to long-term debt which means that blockholder ownership has a positive effect on the
debt maturity of firms, meaning blockholder ownership has a positive effect on firm’s
long-term debt leverage ratio according to this research. Mehran (1992) also found a positive
effect of blockholder ownership and long-term leverage, so based on these papers the
following additional hypothesis has been formed:

H2a: There is a positive relationship between blockholder ownership and a firm's long-term
leverage ratio.

Marchica (2008) concluded that there is a economically significant negative link between
short-term debt and blockholder ownership. This indicates that a negative relationship
between blockholder ownership and short-term debt is expected and a positive relationship
between blockholder ownership and long-term debt is expected, which indicates a difference
between the two relationships. Based on this paper of Marchica (2008) another hypothesis
has been formulated:

H30: There is a negative relationship between blockholder ownership and a firm's short-term
leverage ratio.

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Friend and Lang (1988) also found that the coefficient ownership of the largest blockholder is
significantly positively related to the short-term debt ratio and not to the long-term debt ratio.
This means that, just like Mehran (1992), Friend and Lang (1988) found a positive effect of
blockholder ownership and firm’s short-term debt levels, meaning the following hypothesis is
made:

H3a: There is a positive relationship between blockholder ownership and a firm's short-term
leverage ratio.

The final set of hypotheses that can be formulated due to the earlier stated sub-question is
whether or not there appears to be a difference between the relationship of blockholder
ownership with a firm's long-term leverage ratio and with a firm's short-term leverage ratio.
Whether or not this will be the case will be tested with the help of including a short-term
leverage variable and a long-term leverage variable on which will be elaborated in the next
chapter. For now, the formulated hypotheses are:

H40: There is no difference between the relationship of blockholder ownership with a firm's
long-term leverage ratio and a firm’s short-term leverage ratio.

H4a: There is a difference between the relationship of blockholder ownership with a firm's
long-term leverage ratio and a firm’s short-term leverage ratio.

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3. Data and methodology
In the data and methodology chapter the type and amount of data, which will be used for the
sample for the research, will be communicated together with the data collection procedure.
Furthermore, the methodology to assess the relationship between blockholder ownership and
capital structure is explained. The methodology of this study is based on the model from
Brailsford et al. (2002). First, the data sample and the data collection procedure that are used
in this study are explained. Next, the dependent, independent and control variables that are
used are introduced and explained. Furthermore, the empirical analysis and model that is used
in this study is explained. Finally, the threats to the validity of the research are explained, by
examining the method and data used in this study.

3.1 Data sample

The data that is used in this study, to answer the research question, is data on institutional
ownership and institutional blockholder ownership and is obtained from the database on SEC
13F holdings of Wharton Research Data Services, which is a platform with aggregated and
standardized financial data such as corporate finance and accounting data, data on boards and
directors and market data. Furthermore, firm accounting data and market data is retrieved
from the Compustat and the CRSP databases of Wharton Research Data Services. The initial
sample that is used in this study consists of 14,486 US public firms over the time period 2001
to 2015. Next, the institutional blockholder ownership data is merged with the firm
accounting data and the market data and the sample is reduced to the firms of which there is
accounting information available. This reduces the sample to 8,880 US public firms.
Furthermore, the firms of which the accounting information is not complete are eliminated as
well, since this data is needed to be able to construct the variables that are used in this study.
Finally, the sample is reduced even further since the yearly accounting periods of the firms
need to be equal to each other as well. This reduces the final sample to 6,154 US public
firms. For all the firms in the final sample the total share of institutional ownership, the total
share of ownership of blockholders and the number of blockholders in the firm are retrieved.

3.2 Dependent variables

The capital structure of a firm is throughout the academic literature defined in many different
ways and many different leverage ratios are used to indicate the capital structure. The
debt-assets ratio is often used as the dependent variable in the academic literature and is thus

14
also used in this study on the relationship between blockholder ownership and the capital
structure of a firm. The leverage ratio, used in this study, is thus defined as the ratio of the
book value of debt to the book value of total assets (LEVERAGE) (Friend & Lang, 1988;
Mehran, 1992; Sheikh & Wang, 2012).

Next, long-term debt is also used as a dependent variable instead of total debt since prior
studies on the relationship between blockholder ownership and capital structure state that by
including short-term debt problems might arise due to the different attributes of short-term
debt compared to long-term debt (Tran, 2020). Jensen & Meckling (1976) their agency theory
also only takes into account long-term debt and ignores short-term debt. In this study
long-term debt will thus also be used, next to total debt, as a proxy for debt (LT LEVERAGE)
to investigate the effect of blockholder ownership (Agrawal & Nagarajan, 1990; Mehran,
1992; Brailsford et al., 2002; Fosberg, 2004; Sheikh & Wang, 2012; Tran, 2020).

Furthermore, short-term debt is also used as a dependent variable next to total debt and
long-term debt. It is believed that short-term debt reduces the agency problems between
shareholders and managers since it imposes more refinancing pressure than long-term debt
does. This causes short-term debt to be better at disciplining managers, which reduces the
agency problems and thus the agency costs (Benmelech, 2006). It is also suggested that
blockholders prefer debt with longer maturities because of the trade-off between liquidity and
underinvestment risk (Marchica, 2008; Chen & Yur-Austin, 2007). According to Pan and Tan
(2019), blockholders use short-term debt to diminish the entrenchment effect that debtholders
are worried about. In the literature there are thus mixed conclusions about the effect that
blockholders have on short-term debt usage of firms. In this study short-term debt will thus
also be used, next to total and long-term debt, as a proxy for debt (ST LEVERAGE) to
investigate the effect of blockholder ownership (Mehran, 1992; Marchica, 2008, Chen &
Yur-Austin, 2007).

The book value of total debt is used instead of the market value of total debt since in many
cases it is not possible to estimate the market value of debt due to unlisted debt. Due to this
problem a lot of studies have opted to use the book value of debt instead of the market value
to measure the capital structure and thus the leverage ratio of a firm (Brailsford et al., 2002).
According to Bowman (1980), the book value of debt can be used to measure capital
structure and leverage without distorting these ratios, however he also states that the market

15
value of debt gives a more appropriate indication of the capital structure and leverage of a
firm.

The book value of assets is used in this study since the market value of total assets can be
hard, and in some cases impossible, to obtain, which makes the firms incomparable. Next,
according to Graham and Harvey (2002) book leverage is more useful for managers than
market leverage when making decisions about the capital structure. Moreover, the market
value of assets is in some instances seen as inappropriate to use since variations in the market
leverage are mainly caused by shifts in the market values instead of actual changes in the
leverage (Mehran, 1992; Welch, 2004). Furthermore, preliminary research on this topic
mainly uses the book value of assets instead of the market value of assets as a proxy for
assets and uses this to measure the capital structure and the leverage of a firm. In this study
the book value of assets will thus be used as the proxy for assets. The dependent variable
capital structure is thus indicated by the ratio of the book value of debt to the book value of
the assets.

3.3 Independent variable

Blockholder ownership is the independent variable used in this study. We define
blockholdings (BLOCK) as the cumulative holdings by institutional blockholders (Brickley et
al., 1988; Agrawal & Mandelker, 1990; Baysinger et al., 1991; Ge et al., 2021) and define
institutional blockholders as institutional investors who hold at least 5% of the firm’s
outstanding common shares. To be able to accurately measure the effect of blockholder
ownership on the leverage ratio, the lagged independent variable is used. This is done since it
is believed that there is a time lag in the relationship between blockholder ownership and the
leverage ratio. Next, it is also believed that the effect of the independent variable,
blockholder ownership, occurs gradually over time and causes there to be changes to the
dependent variable, leverage ratio, later in time. The relationship between blockholder
ownership and the leverage ratios is expected to be negative as stated in the hypotheses.

3.4 Control variables

This study aims to measure the effect of blockholder ownership on leverage and thus the
capital structure of a firm. To be able to isolate and measure the actual effect of blockholder
ownership on the leverage and thus the capital structure of a firm, control variables are

16
included to control for other factors and effects that could affect the capital structure next to
the blockholder ownership variable. These control variables include risk, agency cost, asset
specificity and tax effects (Brailsford et al., 2002). These control variables are lagged in time,
like the independent variable, to be able to accurately measure the effect of them on the
leverage ratio. This is done since it is believed that there is a time lag in the relationship
between. Furthermore, it is also believed that the effect of the control variables occurs
gradually over time, like the effect of the independent variable, and causes there to be
changes to the dependent variable, leverage ratio, at a later period of time.

Risk controls
The size (SIZE) control variable is equal to the natural logarithm of the book value of total
assets (Brailsford et al., 2002). The larger the size of a firm and the more diversified a firm is,
the lower the risk of failure of that firm becomes. Which indicates that a firm is able to hold
more debt, the larger the size of the firm is (Friend & Lang, 1988; Agrawal & Nagarajan,
1990). Furthermore, large sized firms also tend to have more and easier access to credit
markets and are thus able to obtain more and cheaper debt (Short et al., 2002). It is thus
predicted that the size of a firm has a positive relationship with its leverage (Friend & Lang,
1988; Short et al., 2002).

The volatility (VOLTY) control variable is equal to the standard deviation of the yearly
percentage change in operating income before interest, taxes and depreciation (Bradley et al.,
1984; Brailsford et al., 2002). The standard deviation of the yearly percentage change in
EBITDA is calculated over the previous three years. According to Ferri and Jones (1979) a
firm’s future earnings are a determining factor in a firm’s ability to meet its future
obligations, which indicates that the earnings volatility is thus a proxy for business risk. Debt
providers will take into account the future and predicted income of the firm and see this as
protection against the firm not meeting its obligations, hence an increase in the earnings
volatility will cause business risk to increase and the supply of debt to decrease (Bradley et
al., 1984; Mehran, 1992). It is thus predicted that the earnings volatility has a negative
relationship with the leverage. For this control variable our study will follow the research of
Titman and Wessels (1988) since they use operating income to measure the earnings volatility
instead of cash flows that are used in the research of Brailsford et al. (2002).

17
Agency cost controls
The growth (GROWTH) control variable is equal to the yearly percentage change in total
assets. Titman & Wessels (1988) and Mehran (1992) propose that agency costs of debt can be
indicated by the growth opportunities of a firm, which in turn can be measured by the
percentage change in total assets of a firm. Next to this, growth can however also be seen as a
proxy for success and profitability of a firm, which causes the firm to have more available
internal funds and thus causes growth to become an indicator of internal funds that are
available for investments. According to the pecking order theory of Myers & Maljuf (1984),
is the usage of internal funds favored over the usage of external debt when investing. Based
on these two perspectives it is thus expected that the growth of a firm has a negative
relationship with its leverage.

The free cash flow (FCF) control variable is equal to the operating income before tax +
depreciation + amortization - tax - dividends (Brailsford et al., 2002). The free cash flow
control variable is scaled against the total assets such that it is comparable with other firms as
done by Brailsford et al. (2002). In the academic literature it is argued that when a firm has
high free cash flows, it does not need to use debt since the firm can finance itself using
internal funds. In accordance with the latter, it is expected that free cash flow has a negative
relationship with leverage.

The profitability (PROF) control variable is equal to the operating income before interest and
taxes divided by total assets. Myers and Maljuf (1984) state that companies that are more
profitable have more internal funds available and thus need less external financing and have
less debt. According to Friend and Lang (1988), there is a negative relationship between
profitability and leverage. It is thus predicted that profitability has a negative relationship
with leverage.

Asset specificity controls

The intangible assets (INTA) control variable is equal to the total intangible assets divided by
total assets. The intangible assets of a firm, including reputational investments, brand names
and research and development expenditure, are firm-specific assets and cause the asset
specificity of a firm to increase (Balakrisnan & Fox, 1993). Balakrisnan and Fox (1993)
further state that firm-specific assets are not redeployable and that asset specificity in this
sense thus negatively affects the ability of a firm to raise debt. It is also stated that the agency

18
costs are lower for tangible assets than for intangible assets and that intangible assets are in
this sense thus more expensive (Myers, 1977). It is thus expected that intangible assets have a
negative relationship with leverage.

Tax controls
The non-debt tax shield (NDTS) control variable is equal to the annual depreciation divided
by total assets. Non-debt tax shields, including depreciation, cause extra debt to have less tax
benefits than the tax benefits on debt the firm already has (DeAngelo & Masulis, 1980). This
causes firms with large non-debt tax shields, for example high depreciations, to have lower
tax benefits when taking on additional debt, which causes firms to take on less debt. It is thus
expected that the non-debt tax shield has a negative relationship with leverage.

3.5 Models
For the empirical analysis several OLS regressions will be performed, where several leverage
ratios (LEVERAGE, LT LEVERAGE & ST LEVERAGE) are the dependent variables, the
cumulative holdings of institutional blockholders (BLOCK) is the explanatory variable and
with seven control variables as shown in table 2 (Appendix B). The data sample may cause
there to be heteroskedasticity, because it consists of multi-year observations of different
firms. The White technique will be used to account for the possible heteroskedasticity, by
constructing robust standard errors. The studies of Brailsford et al. (2002) and Tran (2020)
also make use of standard errors in their empirical research on the relationship between
blockholders and leverage.

The first part of the empirical analysis examines the relation between blockholder ownership
(BLOCK) and total leverage (LEVERAGE). The blockholder ownership variable is included
to determine the effect of blockholder ownership on the leverage ratio and thus the capital
structure of a firm. To avoid issues regarding reverse causality, lagged independent and
control variables are used, which differentiates this study from other studies regarding this
topic. The following regression equation is formulated to test this relationship between the
blockholder ownership and the total leverage:
𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸𝑖𝑡 = β0𝐵𝐿𝑂𝐶𝐾 + β1𝑆𝐼𝑍𝐸𝑖𝑡−1 + β2𝑉𝑂𝐿𝑇𝑌𝑖𝑡−1 + β3𝐺𝑅𝑂𝑊𝑇𝐻𝑖𝑡−1
𝑖𝑡−1
+ β4𝐹𝐶𝐹𝑖𝑡−1 + β5𝑃𝑅𝑂𝐹𝑖𝑡−1 + β6𝐼𝑁𝑇𝐴𝑖𝑡−1 + β7𝑁𝐷𝑇𝑆𝑖𝑡−1+ α𝑖
+ 𝑣𝑡 + ε𝑖𝑡 (1)

19
The second part examines the relationship between blockholder ownership (BLOCK) and
long-term leverage (LT LEVERAGE). This part uses long-term leverage as the dependent
variable instead of total leverage, as done in the first part and model. The independent
variable and the control variables stay the same as in the first part and model. Lagged
independent and control variables are used to avoid issues regarding reverse causality. The
following regression equation is formulated to test this relationship between blockholder
ownership and long-term leverage:
𝐿𝑇 𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸𝑖𝑡 = β0𝐵𝐿𝑂𝐶𝐾 + β1𝑆𝐼𝑍𝐸𝑖𝑡−1 + β2𝑉𝑂𝐿𝑇𝑌𝑖𝑡−1 + β3𝐺𝑅𝑂𝑊𝑇𝐻𝑖𝑡−1
𝑖𝑡−1
+ β4𝐹𝐶𝐹𝑖𝑡−1 + β5𝑃𝑅𝑂𝐹𝑖𝑡−1 + β6𝐼𝑁𝑇𝐴𝑖𝑡−1 + β7𝑁𝐷𝑇𝑆𝑖𝑡−1+ α𝑖
+ 𝑣𝑡 + ε𝑖𝑡 (2)

The final part of the analysis examines the relationship between blockholder ownership
(BLOCK) and short-term leverage (ST LEVERAGE). This part uses short-term leverage as
the dependent variable instead of total or long-term leverage, as done in the first and second
part and model. The independent variable and the control variables stay the same as in the
first and second part and model. Lagged independent and control variables are used to avoid
issues regarding reverse causality. The following regression equation is formulated to test this
relationship between blockholder ownership and short-term leverage:
𝑆𝑇 𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸𝑖𝑡 = β0𝐵𝐿𝑂𝐶𝐾 + β1𝑆𝐼𝑍𝐸𝑖𝑡−1 + β2𝑉𝑂𝐿𝑇𝑌𝑖𝑡−1 + β3𝐺𝑅𝑂𝑊𝑇𝐻𝑖𝑡−1
𝑖𝑡−1
+ β4𝐹𝐶𝐹𝑖𝑡−1 + β5𝑃𝑅𝑂𝐹𝑖𝑡−1 + β6𝐼𝑁𝑇𝐴𝑖𝑡−1 + β7𝑁𝐷𝑇𝑆𝑖𝑡−1+ α𝑖
+ 𝑣𝑡 + ε𝑖𝑡 (3)

3.6 Threats to validity

The data and methodology of this study causes there to be threats to the validity of the results
of the study. The data that is used in the study only covers a certain period of time and is thus
only a snapshot-in-time. This causes the results of the study to be period dependent and thus
not generalizable for different time periods, since the results could be different and
inconsistent over time. Next, the companies that are being examined in this study are public
firms from the USA. This causes the results of the study to be country dependent and thus not
generalizable for different countries, since the results could be inconsistent across different
countries. The results of the study are thus only applicable to US public firms during the time
period that has been examined in this study.

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4. Results
In this chapter the results and findings of the regressions are stated and detailed. First, the
descriptive statistics of the dependent, independent and control variables are presented. Next,
the correlation matrix between the dependent, independent and control variables is provided
and the correlations and potential issues regarding the correlations between the variables are
discussed. Furthermore, the results of the regressions are discussed in detail and the
hypotheses are examined. Finally, the outcome of the robustness check on the results of the
analysis is discussed.

4.1 Descriptive statistics

The descriptive statistics of the dependent, independent and control variables used in the
regression analysis are shown in table 3 (Appendix C). The total leverage ratio variable
(LEVERAGE) has a mean of 21.272 percent (median = 13.598) and ranges from 0 to 8,700
percent. The long-term leverage ratio (LT LEVERAGE) ranges from 0 to 3,959.29 percent
with a mean of 19.03 percent (median = 10.85). The short-term leverage ratio (ST
LEVERAGE) ranges from 0 to 8,700 percent. The average short-term leverage ratio is 2.242
percent (median = 0).

The level of institutional blockholder ownership (BLOCK) ranges from 0 to 57.492 percent
and is on average 15.335 percent (median = 13.844). The natural logarithm of the total assets
size of the firms (SIZE) ranges from -5.521 to 14.477 million euros. The average natural
logarithm of the total assets size of the firms is equal to 5.78 million (median = 5.623). The
volatility of the EBITDA of the firms (VOLTY) is on average 290.03 (median = 37.212) and
ranges from 0.054 to 524,135.31. The growth of the total assets (GROWTH) has a mean of
19.616 percent (median = 5.150) and has a minimum of -100 percent and a maximum of
23,336.006 percent.

The free cash flow variable (FCF) has a minimum of -2,675 percent and a maximum of
181.293 percent. The average free cash flow of the firms is equal to -1.759 percent (median =
7.336). The profitability variable (PROF) is on average -3.137 percent and ranges from
-2,675 percent to 322.076 percent. The average intangible assets (INTA) is equal to 16.254
percent (median = 8.436). The intangible assets ratio has a minimum of 0 percent and a

21
maximum of 95.334 percent. The non-debt tax shield variable (NDTS) has a mean of 4.481
percent (median = 3.494) and ranges from 0 percent to 375.519 percent.

4.2 Correlation matrix

The correlation matrix of the dependent, independent and control variables used in the
regression analysis are displayed in table 4 (Appendix D). The correlations between the
variables indicate whether there is multicollinearity amongst them. This is the case when the
explanatory variables have high and significant correlations among each other. Indicational of
multicollinearity is when the correlations between the explanatory variables exceed 0.4 or are
lower than -0.4 (Tran, 2020).

The correlation values of the variables used in this study are within the range of -0.4 and 0.4
and show no sign of multicollinearity, except for the free cash flow (FCF) and profitability
(PROF) variables. The correlation between FCF and PROF is 0.927, which indicates that
these variables are highly correlated to each other and that they show signs of
multicollinearity. The variance inflation factors (VIF) of the explanatory variables are
calculated, which is a test for multicollinearity, to confirm this suspicion of multicollinearity.
Table 5 (Appendix E) shows the VIF values of the explanatory variables used in this study.
VIF values larger than 5 indicate multicollinearity and thus indicate that the explanatory
variables with VIF values larger than 5 are highly correlated with each other and thus cause
problems to the regression model.

The VIF values of FCF and PROF are 7.695 and 7.876 respectively and are thus larger than
the critical VIF value of 5, which indicates that there is multicollinearity between FCF and
PROF. This requires us to drop the FCF or the PROF variable to eliminate the
multicollinearity from the model. The FCF variable is dropped instead of the PROF variable
since the FCF variable has a VIF value larger than 5 (7.695) and has the lowest correlations
with the dependent variables of the two. Table 6 (Appendix F) presents the VIF values of the
variables after dropping the FCF variable from the model. These VIF values are all lower
than 5, which indicates that the multicollinearity is eliminated from the model by omitting the
FCF variable.

22
4.3 Regression results
This section states the results of the regression analysis and elaborates on the results of the
regressions together with the corresponding hypothesis. First, the effect of blockholder
ownership on the total leverage ratio is analyzed. Second, the effect of blockholder ownership
on the long-term leverage ratio is analyzed. Finally, the effect of blockholder ownership on
the short-term leverage ratio is analyzed and it is examined whether there is a difference
between the effect of blockholder ownership on long- and short-term debt.

4.3.1 Total debt and blockholder ownership

Table 7 (Appendix G) presents the result of the regression of equation 1, where the total
leverage ratio is regressed on blockholder ownership and the control variables. These results
belong to hypothesis 1. The coefficient of the cumulative holdings by institutional
blockholders (BLOCK) is positive, but is not significant at any alpha. This means that
institutional blockholder ownership does not have an effect on the total leverage. Therefore
the null hypothesis 1 can not be rejected. The hypothesis stated that there would be a negative
relationship between BLOCK and LEVERAGE. In this case there is no relationship between
the two variables.

Reviewing the results of the risk control variables shows that the estimated coefficient for
SIZE is positive and for VOLTY is negative, but are not significant. SIZE was expected to be
positive aligning with the literature of Friend & Lang (1988) and Short et al. (2002). Studies
found belonging to the VOLTY variable (Bradley et al., 1984; Mehran, 1992) found a
negative relationship and therefore the estimated coefficient was expected. The agency cost
control variable GROWTH had a negative coefficient, while FCF and PROF had a positive
one, but all the coefficients were not significant. According to literature (Titman & Wessels,
1988; Mehran, 1992; Myers & Maljuf, 1984) the sign of GROWTH was expected to be
negative.

The estimated coefficient for FCF is not in line with the study of Brailsford et al. (2002), as
they expected a negative sign. The same applies for the PROF variable. A negative sign was
expected according to Friend and Lang (1988), but the estimated coefficient is positive. The
INTA control variable shows a positive coefficient, while a negative sign was expected
according to the study of Myers (1977). The coefficient for the control variable NDTS is also

23
positive, while the study of DeAngelo & Masulis (1980) expected a negative sign. Both the
INTA and NDTS control variables were not significant.

4.3.2 Long-term debt and blockholder ownership

Table 8 (Appendix H) presents the result of the regression of equation 2, where only the long
term leverage ratio is regressed on blockholder ownership and the control variables. These
results belong to hypothesis 2. The coefficient of the cumulative holdings by institutional
blockholders (BLOCK) is positive, but is not significant at any alpha. This means that
institutional blockholder ownership does not have an effect on long-term leverage. Therefore
the null hypothesis 2 can not be rejected. The hypothesis stated that there would be a negative
relationship between BLOCK and LT_LEVERAGE. In this case there is no relationship
between the two variables. The expected signs and the estimated coefficient of the control
variables are similar to the results with total debt. All the variables were not significant.

4.3.3 Short-term debt and blockholder ownership

Table 9 (Appendix I) presents the result of the regression of equation 3, where only the short
term leverage ratio is regressed on blockholder ownership and the control variables. These
results belong to hypothesis 3. The coefficient of the cumulative holdings by institutional
blockholders (BLOCK) is negative and is significant at 𝛼 = 0.1 and 𝛼 = 0.05. This means that
institutional blockholder ownership does have an effect on short-term leverage. Therefore the
null hypothesis 3 is not rejected, but accepted. The hypothesis stated that there would be a
negative relationship between BLOCK and ST_LEVERAGE. In this case there is indeed a
negative relationship between the two variables.

The estimated coefficient of the risk control variable SIZE is negative and VOLTY is
positive. This contradicts the literature, as SIZE was expected to be positive according to
literature of Friend & Lang (1988) and Short et al. (2002), while the VOLTY variable was
expected to be negative according to the literature (Bradley et al., 1984; Mehran, 1992). Both
control variables were not significant. The other control variables also do not show any
significant effects, but their results are similar to the results of total debt and only long term
debt.

24
Our findings thus suggest a difference between the relationship of blockholder ownership and
the amount of long-term debt a firm has and blockholder ownership and the amount of
short-term debt a firm has. Our findings suggest a positive, yet insignificant, relationship
between blockholder ownership and long-term debt and a negative and significant
relationship between blockholder ownership and short-term debt, meaning there is indeed a
difference between both relationships.

4.4 Robustness check

The dataset used in this study contains pooled multi-year observations on US public firms
from the 2001 to 2015 time period. Using pooled data could cause the observations to be
correlated across time and thus not be independent, which in turn could cause the regression
results to be biased. To check the robustness of the results, the dataset is divided into two
samples and the regressions are performed again using these sub-samples to see whether the
results of the regressions differ across the different time periods. One data sample contains
the observations from 2001 to 2007 and the other data sample contains the observations from
2008 to 2015.

First, the regressions are performed again using the data sample consisting of the
observations of 2001 to 2007. For the total debt ratio, the sign of BLOCK becomes negative
instead of positive, however it stays insignificant. SIZE and PROF become significant and
PROF becomes negative instead of positive. For the long-term debt ratio, the sign of BLOCK
shows consistent signs with the full sample. SIZE and PROF become significant and
GROWTH becomes significant, while the year dummy variables 2005 and 2006 become
insignificant. PROF becomes negative, while GROWTH becomes positive. For the
short-term debt ratio, the sign of BLOCK becomes insignificant, while SIZE, PROF and the
year dummy variable 2007 become significant.

Finally, the regressions are performed again using the data sample consisting of the
observations of 2008 to 2015. For the total debt ratio, the sign of BLOCK shows consistent
signs with the full sample. SIZE, GROWTH and the year dummy variables 2009 and 2011
become significant and have consistent signs. For the long-term debt ratio, the sign of
BLOCK stays the same. SIZE and GROWTH become significant and consistent signs. For
the short-term debt ratio, the sign of BLOCK stays consistent and significant. All the year

25
dummy variables except for 2015 become significant, while 2015 becomes insignificant. The
signs of the year dummy variables all become negative instead of positive. These variations
in the results indicate that there is a difference across time regarding the effect of the
variables, which could also be the result of the smaller data sample due to the separation of
the full sample.

The issue regarding the multicollinearity of the explanatory variables and how it is dealt with
is already discussed in the correlation matrix section (4.2). The issue regarding
multicollinearity was solved by removing the FCF variable from the models as stated before.
The impact of the multicollinearity and thus the impact of dropping the FCF variable from
the models and regressions is shown in table 10 (Appendix J). When comparing these results
with the results of the regressions after dropping the FCF variable (table 7, 8 & 9), it can be
seen that the results are fairly similar but that in both the total leverage and the long-term
leverage regressions the FCF variable is significant at 𝛼 = 0.05. By not dropping the FCF
variable it can thus be found that FCF is significant in the total leverage and long-term
leverage regressions without affecting the coefficients and the significance of the other
variables too much.

26
5. Discussion and conclusion
In this final chapter the research question and the sub-question will be answered and based on
the results of the study and the hypotheses, conclusions will be drawn. The findings and
results of the study are discussed in detail and compared to the existing literature and their
results and findings. This chapter also discusses the implications and limitations of the study
and states some future research opportunities to gain more insight on the relationship between
blockholder ownership and the capital structure of a firm.

5.1 Discussion
The first hypothesis examines whether there is a relationship between blockholder ownership
and the total leverage of a firm. The results show a positive, but insignificant, relation. This is
in line with the literature of Brailsford, Oliver and Pua (2002), Tran (2020) and Mehran
(1992), as they concluded that taking on extra debt is needed to align the interest of the
shareholders and managers.

However, other studies like Bui (2020), Santos, Moreira and Vieira (2014) and Lundstrum
(2009) found a negative relationship between blockholder ownership and leverage ratio. They
found that blockholders monitor their firms to align the interest between them and the
managers of the firms and will thereby reduce debt instead of increase the debt and thereby
the leverage ratio.

The second hypothesis of this research examines the effect of blockholder ownership on
long-term leverage ratio. The results of the research have found an insignificant positive
relationship. The idea was that long-term debt and blockholder both monitor the firm and
align the interest of the shareholders and manager as by presence of a blockholder, the
long-term debt will be less needed as a monitoring function. This would result in a negative
relationship.

Nevertheless, Andriani and Patrisia (2022) found a positive relationship between blockholder
ownership and long-term leverage, as firms with a blockholder present have easier access to
long-term debt, which means that blockholder ownership has a positive relationship with
long-term leverage ratio. Mehran (1992) also found this positive relationship. These papers
are in line with the positive sign found in this research.

27
The third hypothesis is formulated in order to give insight into whether or not a positive or
negative relationship between blockholder ownership and a firm’s short-term leverage ratio is
visible. According to our findings, there is a significant negative relationship between
blockholder ownership and short-term leverage. These findings are in line with Benmelech
(2006), and Marchica (2008) which also found a negative relationship between blockholder
ownership and short-term leverage attributed to the fact that short-term debt has higher
refinancing pressure and thus has a monitoring function.

The findings of this paper however are not in line with the findings of Friend & Lang (1988),
Mehran (1992) and Pan & Tan (2019). These papers found a positive relationship between
blockholder ownership and the amount of short-term leverage firms have. This positive
relationship gets attributed to the fact that blockholders do in fact use short-term debt (as
opposed to/in combination with) long-term debt in order to keep the interests of managers
aligned with the interests of shareholders, thus reducing agency problems.

Hypothesis four investigates whether or not a difference between the relationship of

blockholder ownership with a firm’s long-term leverage ratio and a firm’s short-term leverage
ratio is found. A difference between both relationships indeed have been found considering
that the long-term leverage relationship is positive but insignificant and the short-term
leverage relationship is negative and significant. The positive relationship of long-term
leverage is in line with the papers of Chen & Yur-Austin (2007) and Mehran (1992) due to
the fact that they suggested that blockholders prefer debt with longer maturities.

The finding that short-term debt is negatively related to blockholder ownership is in line with
the paper of Marchicha (2008), which also found a negative relationship, and with what
Benmelech (2006) suggests. Benmelech suggests that short-term debt is used more
effectively than long-term debt to reduce agency problems due to refinancing pressure.
Short-term debt thus has a monitoring function which is no longer necessary when
blockholders enter the firm, hence the inverse relationship. This finding is however not in line
with the findings of Pan and Tan (2019), considering they find a positive relationship
between blockholders and short-term debt.

28
5.2 Implications
The findings of this study contribute to the existing literature on the relationship between
blockholder ownership and capital structure. The findings propose that retail investors may
want to invest in firms where there are institutional blockholders since they essentially
monitor the firm and improve the efficiency of the firm and try to obtain the firm’s optimal
capital structure.

5.3 Conclusion
This study examined the relationship between blockholder ownership and a firm’s capital
structure. This relationship was investigated by answering the following research question:
“Does institutional blockholder ownership have a statistically significant effect on the capital
structure of US public firms?” The results indicate that institutional blockholder ownership
has a positive but statistically insignificant effect on the capital structure. The following
question was also examined to further investigate the relationship between blockholder
ownership and a firm’s capital structure: “Does institutional blockholder ownership have a
different effect on the long-term capital structure as opposed to the short-term capital
structure of US public firms?”

The results indicate that institutional blockholder ownership has a positive but statistically
insignificant effect on the long-term capital structure and a negative and statistically
significant effect on the short-term capital structure. The relationship between blockholder
ownership and long-term debt does thus differ from the relation between blockholder
ownership and short-term debt since blockholder ownership has a positive and insignificant
effect on long-term debt and a negative and significant effect on short-term debt. Based on
these results it can thus be concluded that institutional blockholder ownership does not have a
statistically significant effect on the capital structure of US public firms and that blockholder
ownership does have a different effect on the long-term capital structure as opposed to the
short-term capital structure of US public firms.

The results and findings are not particularly in accordance with what is mainly depicted in the
existing literature on the relationship between blockholder ownership and the capital structure
of firms. In the literature it is mainly depicted that there is a significant negative relationship

29
between blockholder ownership and capital structure, which in this study was only found for
the short-term capital structure of firms.

5.4 Limitations
This study does however also have certain limitations, which limit the generalizability of the
findings of the study. First, this study only focuses on institutional blockholder ownership
instead of total external blockholder ownership, which could have led to different findings
regarding the effect of blockholder ownership on capital structure. Next, this study only
focuses on US public firms instead of public firms from other countries and continents. By
also focusing on public firms from other countries the findings could have been different
from the findings using only US public firms due to cultural and systematic differences.

Furthermore, the firms that are used in this study are average US public firms and not
necessarily the biggest or the smallest US public firms, which could potentially lead to
different findings regarding the effect of blockholder ownership on capital structure.
Moreover, this study only focuses on the effect of blockholder ownership on capital structure
during the 2001-2015 time period. During this time period the 2007-2008 financial crisis took
place, which could cause the findings of the study to deviate from other time periods and be
different from what was initially predicted.

Finally, this study defines institutional blockholders as institutional investors who hold at
least 5% of the firm’s outstanding common shares. The findings of the study could differ by
additionally using different definitions and alternative ownership proxies, by for example
increasing the percentage of common shares a institution must hold to be able to be called a
blockholder.

5.5 Future research

To obtain a better and more general understanding of the relationship between blockholder
ownership and the capital structure of a firm and to get a more complete view on the topic,
future research could conduct research on public firms from other countries instead of only
US public firms to see whether there is a difference between different countries and to try to
generalize the findings and results to firms from other countries as well.

30
Next, future research could also investigate the effect of total external blockholder ownership
instead of only institutional blockholder ownership to see whether this yields different results.
Furthermore, future studies could conduct further research on the effect of blockholder
ownership on the capital structure of a firm by investigating different time periods. They
could for example investigate the effect of blockholder ownership on the capital structure of a
firm during the COVID-19 crisis and the period before that to see whether the results differ
across different time periods and whether they differ during volatile and stable time periods.

Moreover, future research on the effect of blockholder ownership on the capital structure of a
firm could also be conducted on the largest and smallest US public firms. This can be done to
see whether the results differ from the results of this study and to see whether there is a
difference between the effect on the largest and smallest firm’s capital structure. Finally,
future research could do the same study as we did; however instead of using our definition
and proxy of blockholder ownership, use another definition and proxy of blockholder
ownership and see whether this yields different results.

31
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35
 Appendix A
Table 1: Overview of research papers on blockholder ownership’s effect on leverage ratio
Author(s) Country/region Period Sample size Effect blockholder ownership

Grossman & Hart (1982) * * * +

Mehran (1992) US 1979-1980 124 +

Brailsford et al. (2002) Australia 1989-1995 49 +

Forsberg (2004) US 1990-1996 142 +

Abor & Biepke (2006) South-Africa 2000-2004 68 +

Lundstrum (2009) US 1989-1993 999 -

Margaritis & Psillaki (2010) France 2002-2005 6146 No effect

Chen et al. (2013) Taiwan 1990-2011 711 +

Santos et al. (2014) West Europe 2002-2006 694 -

Shoaib & Yasushi (2016) Pakistan 2004-2008 155 +

Hayat et al. (2018) US 2009-2016 183 +

Hayat et al. (2018) China 2009-2016 92 -

Hussein et al. (2019) Egypt 2012-2017 50 Insignificant

Bui (2020) US 1989-2009 653 -

Tran (2020) Germany 2013-2018 137 +

36
Appendix B
Table 2: Dependent, independent and control variables

Variable Name Measurement Source

Dependent Variables

LEVERAGE The book value of total debt divided by the WRDS

book value of total assets

LT LEVERAGE The book value of long-term debt divided by WRDS

the book value of total assets

ST LEVERAGE The book value of short-term debt divided by WRDS

the book value of total assets

Independent Variable

BLOCK Cumulative holdings by institutional WRDS

blockholders

Control Variables

SIZE Natural logarithm of the book value of total WRDS

assets

VOLTY The standard deviation of the yearly WRDS

percentage change in EBITDA

GROWTH Yearly percentage change in total assets WRDS

FCF Operating income before tax + depreciation + WRDS

amortization - tax - dividends scaled by total
assets

PROF Operating income before interest and taxes WRDS

divided by total assets

INTA Total intangible assets divided by total assets WRDS

NDTS Yearly depreciation divided by total assets WRDS

37
Appendix C
Table 3: Descriptive statistics

N Mean Median SD Min Max

LEVERAGE 40806 21.272 13.598 60.518 0 8700

LT LEVERAGE 40806 19.03 10.850 41.499 0 3959.29

ST LEVERAGE 40806 2.242 0.000 44.163 0 8700

lagBLOCK 32250 15.335 13.844 13.117 0 57.492

lagSIZE 32247 5.78 5.623 2.124 -5.521 14.477

lagVOLTY 17006 290.03 37.212 7077.15 .054 524135.31

lagGROWTH 27368 19.616 5.150 199.292 -100 23336.006

lagFCF 32247 -1.759 7.336 43.509 -2675 181.293

lagPROF 32247 -3.137 5.501 42.798 -2675 322.076

lagINTA 32247 16.254 8.436 19.157 0 95.334

lagNDTS 32247 4.481 3.494 5.618 0 375.519

38
Appendix D
Table 4: Correlation matrix

39
Appendix E
Table 5: Variance inflation factor (VIF)

VIF 1/VIF

lagPROF 7.876 .127

lagFCF 7.695 .13

lagSIZE 1.255 .797

lagNDTS 1.091 .916

lagINTA 1.084 .922

lagBLOCK 1.058 .946

lagGROWTH 1.004 .996

lagVOLTY 1 1

Mean VIF 2.758 .

40
Appendix F
Table 6: Variance inflation factor (VIF) without lagFCF

VIF 1/VIF

lagSIZE 1.255 .797

lagPROF 1.163 .86

lagINTA 1.084 .923

lagBLOCK 1.057 .946

lagNDTS 1.012 .988

lagGROWTH 1.004 .996

lagVOLTY 1 1

Mean VIF 1.082 .

41
Appendix G
Table 7: OLS regression results total debt on blockholder ownership

(1) (2) (3)

LEVERAGE

VARIABLES coef se tstat

lagBLOCK 0.00152 (0.0193) 0.0787

lagSIZE 2.383 (1.796) 1.327

lagVOLTY -1.23e-06 (8.32e-06) -0.147

lagGROWTH -0.000787 (0.00109) -0.723

lagPROF 0.0562 (0.0789) 0.712

lagINTA 0.00119 (0.0746) 0.0159

lagNDTS 0.319 (0.209) 1.524

2005.DataYearFiscal -2.392 (1.514) -1.579

2006.DataYearFiscal -1.617 (1.518) -1.066

2007.DataYearFiscal -0.534 (1.576) -0.339

2008.DataYearFiscal 3.843 (2.898) 1.326

2009.DataYearFiscal 0.517 (1.874) 0.276

2010.DataYearFiscal 0.515 (2.351) 0.219

2011.DataYearFiscal -0.600 (1.795) -0.334

2012.DataYearFiscal 0.328 (1.792) 0.183

2013.DataYearFiscal 0.753 (1.902) 0.396

2014.DataYearFiscal 2.211 (1.961) 1.127

2015.DataYearFiscal 5.455** (2.125) 2.567

Constant 2.143 (9.892) 0.217

Observations 17,005

R-squared 0.007

Number of permno 3,042

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

42
Appendix H
Table 8: OLS regression results long-term debt on blockholder ownership

(1) (2) (3)

LT_LEVERAGE

VARIABLES coef se tstat

lagBLOCK 0.0129 (0.0191) 0.672

lagSIZE 2.569 (1.715) 1.498

lagVOLTY -1.90e-06 (7.73e-06) -0.246

lagGROWTH -0.000781 (0.00109) -0.714

lagPROF 0.0350 (0.0617) 0.568

lagINTA 0.000599 (0.0743) 0.00806

lagNDTS 0.223 (0.220) 1.010

2005.DataYearFiscal -3.244** (1.619) -2.003

2006.DataYearFiscal -2.785* (1.685) -1.653

2007.DataYearFiscal -1.632 (1.707) -0.956

2008.DataYearFiscal 2.203 (2.976) 0.740

2009.DataYearFiscal -0.685 (1.996) -0.343

2010.DataYearFiscal -0.413 (2.428) -0.170

2011.DataYearFiscal -1.579 (1.907) -0.828

2012.DataYearFiscal -0.825 (1.888) -0.437

2013.DataYearFiscal -0.420 (1.977) -0.213

2014.DataYearFiscal 1.067 (2.035) 0.524

2015.DataYearFiscal 4.020* (2.178) 1.845

Constant 0.654 (9.547) 0.0685

Observations 17,005

R-squared 0.005

Number of permno 3,042

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

43
Appendix I
Table 9: OLS regression results short-term debt on blockholder ownership

(1) (2) (3)

ST_LEVERAGE

VARIABLES coef se tstat

lagBLOCK -0.0114** (0.00518) -2.191

lagSIZE -0.186 (0.197) -0.944

lagVOLTY 6.70e-07 (1.00e-06) 0.667

lagGROWTH -5.20e-06 (9.34e-05) -0.0557

lagPROF 0.0212 (0.0201) 1.053

lagINTA 0.000588 (0.00463) 0.127

lagNDTS 0.0964 (0.0712) 1.354

2005.DataYearFiscal 0.853 (0.684) 1.247

2006.DataYearFiscal 1.168* (0.701) 1.667

2007.DataYearFiscal 1.098 (0.693) 1.585

2008.DataYearFiscal 1.640** (0.692) 2.370

2009.DataYearFiscal 1.203* (0.722) 1.667

2010.DataYearFiscal 0.927 (0.706) 1.313

2011.DataYearFiscal 0.979 (0.702) 1.394

2012.DataYearFiscal 1.153 (0.711) 1.622

2013.DataYearFiscal 1.173 (0.719) 1.632

2014.DataYearFiscal 1.144 (0.715) 1.601

2015.DataYearFiscal 1.435* (0.746) 1.924

Constant 1.489 (1.204) 1.237

Observations 17,005

R-squared 0.010

Number of permno 3,042

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

44
 Appendix J
Table 10L OLS regression results without dropping FCF

(1) (2) (3) (4) (5) (6)

LEVERAGE LT_LEVERAGE ST_LEVERAGE

VARIABLES coef se coef se coef se

lagBLOCK 0.00153 (0.0194) 0.0129 (0.0192) -0.0114** (0.00518)

lagSIZE 2.169 (1.851) 2.374 (1.763) -0.205 (0.205)

lagVOLTY -9.94e-07 (8.40e-06) -1.68e-06 (7.80e-06) 6.91e-07 (1.01e-06)

lagGROWTH -0.000822 (0.00112) -0.000814 (0.00112) -8.33e-06 (9.32e-05)

lagFCF 0.0459** (0.0215) 0.0418** (0.0190) 0.00405 (0.00435)

lagPROF 0.0138 (0.0608) -0.00367 (0.0460) 0.0174 (0.0177)

lagINTA 0.00346 (0.0749) 0.00267 (0.0746) 0.000789 (0.00469)

lagNDTS 0.276 (0.217) 0.183 (0.230) 0.0926 (0.0695)

2005.DataYearFiscal -2.383 (1.511) -3.237** (1.620) 0.853 (0.683)

2006.DataYearFiscal -1.587 (1.515) -2.758 (1.685) 1.171* (0.701)

2007.DataYearFiscal -0.473 (1.579) -1.576 (1.713) 1.103 (0.692)

2008.DataYearFiscal 3.925 (2.926) 2.278 (3.001) 1.648** (0.691)

2009.DataYearFiscal 0.571 (1.885) -0.637 (2.008) 1.207* (0.721)

2010.DataYearFiscal 0.564 (2.356) -0.367 (2.434) 0.932 (0.706)

2011.DataYearFiscal -0.539 (1.804) -1.523 (1.917) 0.984 (0.702)

2012.DataYearFiscal 0.413 (1.806) -0.748 (1.903) 1.161 (0.711)

2013.DataYearFiscal 0.882 (1.927) -0.303 (2.001) 1.184* (0.719)

2014.DataYearFiscal 2.381 (1.995) 1.222 (2.066) 1.159 (0.715)

2015.DataYearFiscal 5.590*** (2.150) 4.142* (2.202) 1.447* (0.747)

Constant 3.459 (10.24) 1.853 (9.852) 1.605 (1.234)

Observations 17,005 17,005 17,005

R-squared 0.007 0.006 0.010

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

45