The effect of separating ownership from control on leverage in Sub-Saharan African listed firms

Abstract

Context: This study seeks to examine the effect of separating ownership from control (SOC) on firm leverage in Sub-Saharan Africa, particularly, Kenya, Nigeria and South Africa. Research shows that the SOC or control-ownership wedge ratio (i.e. the deviation between control rights and cash-flow rights) positively affects firm leverage. One of the reasons given for this positive effect is that the large controlling shareholders use the high levels of debt to expropriate the wealth of the minority shareholders, to satisfy their private benefits. Owing to the misalignment of interests between the large and minority shareholders, research documents that the minority shareholders elect a board of directors that exerts pressure on managers to reduce debt financing, thus, satisfying the interests of all the shareholders. Nonetheless, no research has been done to evaluate the effect of SOC on capital structure, in Africa. Methods: The study uses the sampled firms’ financial statements as well as the I-Net Iress database, to collect the relevant data. The sample period runs from 2006 to 2017. The study challenges three hypotheses. The first hypothesis is that there is the incidence of the SOC in Sub-Saharan Africa. The second hypothesis is that the SOC or control ownership wedge ratio (CW) has a positive effect on firm leverage, in Sub-Saharan African firms. The third hypothesis is that a large board (in widely held firms) positively affects firm leverage. Panel data regressions are used to examine the effect of the SOC on firm leverage. The Arellano and Bond (1991) Generalised Method of Moments (GMM) procedure is used to perform the robustness checks. Findings: The descriptive results document evidence that there is the incidence of the SOC in Sub-Saharan firms. Most importantly, the results document a statistically significant and positive relationship between the CW and firm leverage. Finally, the results designate that there is a negative association between a large board size and firm leverage. Conclusions: These results suggest that owing to the SOC, the large controlling shareholders exert pressure on a firm’s subsidiaries to issue high levels of debt, to avoid the dilution of ownership and control as well as expropriate the wealth of the minority shareholders (through private benefits). A large board has a negative significant impact on firm leverage, in dispersed Sub-Saharan firms, indicating that large boards (in widely Sub-Saharan firms) serve their purpose of protecting minority shareholders’ interests using capital structur