The Impact of Ownership Structure on Debt Financing of Japanese Firms With the agency cost of Free Cash Flow

This paper, using 833 observations of listed Japanese firms between the years 1992 to 2000, explore the implications of the free cash flow hypothesis concerning the disciplinary role of ownership structure in corporate capital structure policy. The results show (1) The relation between leverage and free cash flow are significantly positive and greater for low-growth firms than for the high-growth firms. (2) In the firms with low growth opportunities, institutional investors discourage managerial overspending by governance process and hence compensate for the debt monitoring. The managerial ownership may align the interest of shareholders and mangers and also compensates for the leverage. In the firms with high growth opportunities, institutional investors encourage higher leverage. (3) Keiretsu classification affects relations between ownership structure and leverage. Overall, the results generally support the hypothesis that conflicts of interest between shareholders and managers vary with growth opportunities and free cash flow and there is disciplinary role of ownership structure in capital structure policy. EFM classification codes: 110, 140