Impact of ownership structure on capital structure of New Zealand unlisted firms

Purpose - The purpose of this paper is to use a panel of New Zealand unlisted firms from 1998 to 2009 to examine the relationship between ownership structure and firm leverage ratios. Although, the choice of the debt in capital structure is important for all firms, the scale effects may influence the degree of influence of particular financial theories upon capital structure. Design/methodology/approach - To control the endogeneity effect of insider ownership, this study uses the dynamic panel generalised method of moment estimation and uses the Granger causality test to check the causality effect of leverage and insider ownership. Findings - The findings suggest an inverse U-shape relationship of insider ownership and leverage, indicating higher insider ownership increases management entrenchment while lower insider ownership increases misalignment of the interests of management and owners. Moreover, this study finds bi-directional causation between insider ownership and firm leverage ratios. Practical implications - Finance policy needs to vary across firm type, industries and firm characteristics and should match the different borrowing requirements of small business. Originality/value - This paper contributes to literature by investigating whether the structure of equity ownership can impact cross-sectional variations in capital structure. Moreover, most of the capital structure research has been conducted in large markets like USA and publicly listed firms but this paper concentrates on the evidence from New Zealand unlisted businesses. Also, the econometric analysis is more robust due to controlling for the endogeneity effect of insider ownership.