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Investment opportunities and leverage: some Australian evidence on the role of board monitoring and director equity ownership

Hutchinson, Marion and Gul, Ferdinand A. 2002, Investment opportunities and leverage: some Australian evidence on the role of board monitoring and director equity ownership, Managerial finance, vol. 28, no. 3, pp. 19-36, doi: 10.1108/03074350210767717.

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Title Investment opportunities and leverage: some Australian evidence on the role of board monitoring and director equity ownership
Author(s) Hutchinson, Marion
Gul, Ferdinand A.
Journal name Managerial finance
Volume number 28
Issue number 3
Start page 19
End page 36
Publisher Emerald Group Publishing
Place of publication Bingley, England
Publication date 2002
ISSN 0307-4358
1758-7743
Keyword(s) investment opportunities
board monitoring
share ownership
debt structure
Summary This paper tests the hypothesis that the negative relationship between investment opportunity set (IOS) and debt is moderated by board monitoring and director equity ownership. According to contracting theory, firms with high growth opportunities (high IOS) are associated with lower levels of debt as a result of the asset substitution and the under-investment problem. However, our hypotheses test the conjecture that the negative debt / IOS relationship will be moderated by the proportion of non-executive directors (NEDs) on the board and director equity ownership. NEDs provide higher monitoring which reduces management discretion while director equity ownership provides incentives for managers to maximize the value of the firm. More specifically, we expect that high growth firms with a higher proportion of non-executive directors and director equity ownership are less likely to be associated with asset substitution and under investment. Thus, the negative investment opportunity set / debt relationship will be weaker for firms with higher levels of non-executive directors and high director equity ownership. Data collected from Australian companies support both these two hypotheses. Results have significant implications for corporate finance theory.
Language eng
DOI 10.1108/03074350210767717
Field of Research 150201 Finance
Socio Economic Objective 970115 Expanding Knowledge in Commerce, Management, Tourism and Services
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2002, Emerald Group Publishing
Persistent URL http://hdl.handle.net/10536/DRO/DU:30001449

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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