Does ownership concentration affect cost of debt? Evidence from an emerging market

Abstract

Purpose The purpose of this paper is to explore how ownership concentration affects cost of debt (CoD) in one of the most important emerging markets in the Middle East and North Africa, Morocco. Design/methodology/approach The study employs panel data analysis using non-financial firms listed on Casablanca Stock Exchange (CSE) between 2004 and 2016. To unveil the hidden facets of the relationship between ownership concentration and CoD, and examine if this relationship changes with market conditions, we conduct a pre–post-crisis analysis. Findings The results demonstrate that controlling shareholders promote decent governance as long as they are able to generate appropriate returns. However, this behavior seems to change during the post-crisis period. In their attempts to increase their returns adversely affected by the financial crisis, controlling shareholders switch from guardians of decent governance and firm’s resources to a menace to creditors’ interests. Practical implications Our results expose the severity of agency problems in CSE. It is the duty of all market participants including regulators, board of directors, financial analysts, shareholders and creditors to scrutiny and reinforce governance mechanisms to alleviate expropriation by controlling shareholders. Improving country and firm-level governance mechanisms would enhance investors’ protection, attract international investors and boost the economic activity. Originality/value Prior research is inconclusive about the impact of ownership concentration on CoD. Hence, it is worthwhile to seek new evidence in a new market on the nature of this relationship.