An empirical analysis of incremental capital structure decisions under managerial entrenchment

We study incremental capital structure decisions of Dutch companies. From 1977 to 1996 these companies have made 110 issues of public and private seasoned equity and 137 public issues of straight debt. Managers of Dutch companies are entrenched. For this reason a discrepancy exists between managerial decisions and shareholder reactions. Confirming Zwiebel [American Economic Review (1996) 1197–1215] we find that Dutch managers avoid the disciplining role of debt allowing them to overinvest. However, the market reactions show that this overinvestment behavior is recognized. We do not find a confirmation of the adverse selection model of Myers and Majluf [Journal of Financial Economics (1984) 187–221]. This is probably due to the entrenchment of managers and the prevalence of rights issues.