An empirical analysis of incremental capital structure decisions under managerial entrenchment

We study incremental capital structure decisions of Dutch companies. From 1 977 to 1996 these companies have made 110 issues of public and private seas oned equity and 137 public issues of straight debt. Managers of Dutch compa nies are entrenched. For this reason a discrepancy exists between manageria l decisions and shareholder reactions. Confirming Zwiebel [American Economi c Review (1996) 1197-1215] we find that Dutch managers avoid the disciplini ng role of debt allowing them to overinvest. However, the market reactions show that this overinvestment behavior is recognized. We do not find a conf irmation of the adverse selection model of Myers and Majluf [Journal of Fin ancial Economics (1984) 187-221]. This is probably due to the entrenchment of managers and the prevalence of rights issues. (C) 2001 Elsevier Science B.V. All rights reserved.