Managerial ownership as a corporate governance mechanism in shaping leverage decisions: insights from Indonesia

This paper examines the extent to which managerial ownership plays a moderating role in the association between leverage decisions and firm value; that is, whether managerial ownership could become an effective corporate governance mechanism to discipline managers for the use of debt, hence driving firm value. Based on a data set comprising 2907 firm-year observations of listed firms in Indonesia, our empirical evidence reveals that managerial ownership plays a moderating role in the relationship between leverage decisions and firm value. This is consistent with the notion that, as managers become entrenched, they become more concerned about the risk associated with a high level of debt. Such behavior encourages them to reduce the level of debt, which in turn results in higher firm value. The results of this study suggest that managerial ownership appears to be an effective governance mechanism to prevent firms from having an overwhelmingly high level of debt, especially in emerging markets with weaker institutional environments.