Financial Capital Structure in LBO Projects Under Asymmetric Information

-- Ouidad Yousfi

This paper analyzes the link between the financial capital structure in LBO (Leveraged Buyout) acquisitions and the agents’ incentives under asymmetric information. We present a static model with three agents: the entrepreneur, the LBO fund and the bank. The first two agents provide complementary and non-observable efforts to enhance the distribution of the project’s revenues. Our results provide evidence that there are no debt-equity contracts that solve the double-sided moral hazard problem; however, the project must be financed jointly by the three partners. Moreover, financing the project through a mixture of debt and equity or solely through equity does not improve the incentive to provide efforts. Under taxation, agents provide low levels of efforts, but the entrepreneur is better off if the level of leverage is the highest to take advantage of the tax deductibility of interests.

© 2012 IUP. All Rights Reserved.

The Role of Ownership Structure in Firm Performance: A Study of Indian Manufacturing Firms

-- Rajesh Pathak, Ranajee and Sudeepta Pradhan

The significance of corporate governance has increased in the recent past due to factors like increase in corporate scandals. Such scandals tend to increase the risk of the stakeholders to a great extent. While stakeholders have the capability to influence the forbearance and performance of an organization, such impact varies with the industry. This study makes an endeavor to find the impact of promoter holding, institutional holding and individual holding on firm performance by analyzing several diverse industries. Seven industries are considered in the Indian context for the purpose of this study, taking ROA as a major performance indicator. The results show positively significant effect of some stakeholders, while negative for the others, substantiating the need for more research in the area.

© 2012 IUP. All Rights Reserved.

The Impact of Corporate Governance Mechanisms on Audit Quality: Evidence from Tunisia

-- Ikbel Makni, Mohamed Chakib Kolsi and Habib Affes

The purpose of this paper is to analyze the impact of corporate governance mechanisms (i.e., ownership structure, size, debt and the composition of the board of directors) on the external demand for a higher quality or reputed auditor. The latter, which is estimated by the Principal Component Analysis (PCA) procedure, is based on the size of the audit firm, firm’s reputation, its experience in auditing, industry specialization, and the extent to which Information and Communication Technologies (ICT) are used. Using a sample of 137 firm-year observations for the period 2005-2009, the results show that board size, CEO-chairman duality, and the presence of majority shareholders positively affect the demand for higher quality auditor. In contrast, the presence of institutional investors and the customer firm size negatively impact the demand for better quality auditor. Further, the existence of independent members on the board of directors, the ownership of the CEO and the level of indebtedness of the audited firm have no effect on the choice of a reputed auditor.

© 2012 IUP. All Rights Reserved.

Board Diversity and Corporate Performance: The Indian Evidence

-- Shital Jhunjhunwala and R K Mishra

The paper examines whether board diversity improves corporate performance by considering different parameters of diversity such as gender, age, tenure, nationality, educational background and experience of the directors. No significant link between board heterogeneity and financial performance in Indian firms is found. The possible explanation for this may be that diversity in teams often leads to conflicts, adversely affecting performance unless properly managed.

© 2012 IUP. All Rights Reserved.