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RBF
12,3
282
Received 17 October 2018
Revised 29 November 2018
11 January 2019
Accepted 28 February 2019
Review of Behavioral Finance
Vol. 12 No. 3, 2020
pp. 282-296
© Emerald Publishing Limited
1940-5979
DOI 10.1108/RBF-10-2018-0106
Does ownership concentration
affect cost of debt? Evidence from
an emerging market
Imad Jabbouri and Maryem Naili
School of Business Administration, Al Akhawayn University,
Ifrane, Morocco
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.
Keywords Corporate governance, Emerging markets, Ownership concentration, Cost of debt,
Agency problems
Paper type Research paper
1. Introduction
In financial markets dominated by information asymmetries and opacity, investors are
faced with the increasingly challenging task of properly assessing the riskiness of their
investments. The gravity of this issue increases manifold in emerging markets. Previous
research associates emerging markets with inadequate governance environment,
ineffective regulatory authorities and weak protection of outside investors (minority
shareholders and creditors). As a result, agency costs of equity and debt intensify, which
raises outside investors’ fear of insiders’ expropriation. The fear of expropriation has far
worse consequences in markets characterized by low investor protection and weak law
enforcement. It represents a major cause behind the dearth of capital, which hinders the
development of emerging financial markets and the takeoff of their respective economies.
Therefore, the necessity to strengthen the governance mechanisms is undeniable.
Given that previous studies document the ineffectiveness of traditional governance
mechanisms in emerging markets (Balasubramanian et al., 2010), ownership concentration
can serve as an effective structure to improve the governance environment and restore
creditors’ trust. As a matter of fact, Farooq and El Kacemi (2011) contend that the majority
of firms are owned and controlled by insiders in emerging markets. Ownership
concentration reduces agency problems and improves firms’ performance by monitoring
and disciplining self-serving management. Gedajlovic and Shapiro (2002) advance that
large stake in a firm is the main motivation behind monitoring managers. In the same line, Ownership
Chami (2001) asserts that controlling shareholders are more committed to reduce agency concentration
problems and build a reputation of decent treatment of outside investors. Thus, creditors
perceive concentrated ownership as a structure that enhances the governance
environment within the firm and reduces its riskiness. They reward it, hence, by
requiring a lower rate of return.
An opposing strand of literature suggests that concentrated ownership can be detrimental 283
to the governance of the firm. Controlling shareholders may exercise their power to prioritize
their own interests, tunnel the firm’s resources and expropriate outside investors (Mitton,
2002; Shleifer and Vishny, 1986). Such practices can destroy the firm value, increase its
riskiness, and limit its capacity to raise external financing. Aware of these potential conflicts
of interest, creditors incorporate the additional risks associated with ownership concentration
in their credit analysis and associate it with a higher required yield.
Given the contradicting arguments presented above, this research attempts to examine
how ownership concentration affects cost of debt (CoD) in one of the most important
emerging markets in the Middle East and North Africa (MENA), Morocco. This topic is
relevant given the significantly low number of companies with diffuse ownership structure
in Morocco in comparison with developed markets. Moreover, to our best knowledge, no
prior research has investigated the relationship between ownership structure and CoD in
Morocco or any other MENA market. Further, Aslan and Kumar (2012) contend that there is
sparse literature and empirical work on the effects of concentrated ownership on CoD.
Despite the role of debt as the primary source of external financing for firms in Morocco and
many other economies, prior literature has focused on the effects of ownership concentration
on equity valuation (Claessens et al., 2002; La Porta et al., 2002; Lins, 2003), while the effects
of ownership concentration on the welfare of creditors has received relatively little attention
(Aslan and Kumar, 2009).
The Kingdom of Morocco is a monarchy where King Mohammed VI is the head
of state. In an official speech on August 20, 2014, the King Mohammed VI said that his
country’s development model has reached maturity and deserves to join the group of
emerging nations once and for all (Alaoui, 2014). The kingdom has witnessed substantial
political and economic reforms over the last decade, which makes it the most stable
country in the MENA region and one of its most promising economies (Country Watch
Incorporated, 2017). Morocco’s economy is expected to remain a relative outperformer
compared to other MENA countries over the short and medium terms (Country Watch
Incorporated, 2017). The Kingdom has positioned itself as a leading export-oriented
manufacturing hub for the European market and progressively for the Sub-Saharan
Africa, which makes it a favorable destination for international investors seeking growth
and international diversification.
The Casablanca Stock Exchange (CSE), established in 1929, is the official stock market
of Morocco and the third largest stock exchange in Africa. In April 2009, the CSE
instigated a set of new regulations to enhance investment transparency, protect investors’
rights, and attract foreign investors. Even though the launching of these new regulations
was a substantial step in the process of revitalizing the market and restoring investors’
confidence, the main challenge remains the enforcement of these regulations ( Jabbouri,
2016). Furthermore, Jabbouri and El Attar (2017) assert that most of the actions
undertaken by the regulatory authorities of CSE have focused on protecting shareholders’
rights and neglected creditors’ rights, which may weaken their role as the primary source
of financing in this economy and give rise to severe agency problems between
shareholders and creditors.
This study has significant theoretical and practical contributions. This research intends
to add empirical evidence to the corporate finance literature by reporting how ownership
RBF concentration affects CoD in the emerging market of CSE. Byun (2007) contends that
12,3 corporate governance generally benefits shareholders, but could involve different
consequences for creditors. Prior research suggests that the net effect of decent
shareholders’ governance on creditors is theoretically unclear (Anderson et al., 2003; Aslan
and Kumar, 2009; Klock et al., 2005), which makes this topic an interesting substance for
empirical research. Moreover, the current study extends previous research by exploring an
284 emerging market characterized by a different institutional and cultural context from
developed markets, which may provide new insights about the nature of the relationship
between ownership concentration and CoD. Furthermore, the severity of agency problems in
CSE (Baker and Jabbouri, 2016, 2017) makes the study of various internal governance
mechanisms a crucial issue. Our findings may be useful to various parties including
creditors and financial analysts, who can obtain a new reliable indicator of the quality of
corporate governance to help them better assess the riskiness of the firm. Our results are
most likely generalizable to similar countries in the MENA region.
The rest of the paper is organized as follows: Section 2 presents the literature review and
hypotheses development. Section 3 outlines the setup of data and methodology and defines
the different measures and variables used in this research. Section 4 illustrates the empirical
procedure and Section 5 discusses the results. Section 6 presents the robustness tests before
concluding in Section 7.

2. Literature review and hypotheses development

Concentrated ownership can be described as shareholders holding a significant equity
claim in the company[1] that grants them both the incentive and the power to discipline
managers. Large shareholders have the incentives and the necessary expertise to
maximize the firm’s value by reducing agency costs (Admati et al., 1994; Barclay and
Holderness, 1992; Shleifer and Vishny, 1986). They are active in the corporate decision
making process for several reasons. For instance, their substantial investment at stake
remains the main motivation to switch from a passive monitoring to an active role in
scrutinizing management (Shleifer and Vishny, 1986). Moreover, the potential benefits
large shareholders can capture from actively monitoring management exceed the
associated costs and reward them for the resources committed to execute an appropriate
monitoring. Hermes Focus Fund and CalPERS are two celebrated examples of funds that
target underperforming companies that suffer from corporate governance issues.
Empirical evidence reveals that thanks to the active monitoring exercised by the funds,
the targeted firms were able to improve their performance and the funds outperformed the
main market indices (Becht et al., 2007; Smith, 1996).
Shleifer and Vishny (1997) argue that large shareholders enjoy an easier access to
information, which contributes to reducing agency problems as opposed to dispersed
ownership. Furthermore, given their sizeable holdings, an exit strategy prompted by
governance concerns may trigger significant losses for large shareholders (Gospel and
Pendleton, 2003). Therefore, active monitoring becomes a more appealing alternative,
especially that their large holdings facilitate corrective actions such as voting against
anti-takeover amendments or other undue managerial behavior that may negatively affect
the firm’s value (Agrawal and Mandelker, 1990; Gaspar et al., 2005).
The importance of concentrated ownership increases in the absence of country-level
governance mechanisms, and the limited investor protection provided by different state
institutions (Bebchuk, 1999; Gomes, 2000; La Porta et al., 1999; Burkart et al., 2003). This
strand of literature suggests that large shareholders insinuate an implicit assurance to
outside investors that their interests in the firm are protected. Furthermore, in their
attempt to maximize the firm’s value, major shareholders strive to create and maintain a
favorable public opinion about their firm in the debt market (Anderson et al., 2003).
Creditors view the concern of shareholders for reducing agency problems and creating Ownership
value as a guarantee to recoup their investments, which makes them more inclined to concentration
grant them loans at favorable rates. Thus, we hypothesize that ownership concentration
reduces the risks perceived by creditors, which should result in a negative relationship
between ownership concentration and CoD.
Contrary to the arguments presented above, an equally compelling argument indicates
that concentrated ownership may exercise weak monitoring or prioritize its own benefits 285
at the expense of minority shareholders’ and creditors’ interests (Agrawal and Knoeber,
1996; la Porta et al., 1999; Claessens et al., 2002; Dyck and Zingales, 2004). Block-holders
may, using internal communication channels, have easier access to information. As a
result, they may influence and monitor the decision making process to serve their private
interests at the expense of outside investors (Bhojraj and Sengupta, 2003). When
information asymmetry is high, the overall risk perceived by creditors is higher because
the firm’s environment encourages value destroying actions as well as earning
manipulation by management (Roberts and Yuan, 2006). Moreover, due to the unbalance
of power, controlling shareholders are tempted to take part in expropriating and tunneling
firms’ resources ( Johnson et al., 2000). For example, controlling shareholders can
expropriate resources by paying themselves excessive salaries or special dividends,
avoiding risk and offering their unqualified relatives executive positions and board seats
(Wiwattanakantang, 2001). In the same line, Liu and Tian (2012) argue that in emerging
markets, where legal protection for creditors and shareholders is weak, controlling
shareholders tunnel resources through inter-corporate loans and related party
transactions rather than investing in positive NPV projects.
Furthermore, Zhang (1998) claims that controlling shareholders are tempted to make
non-optimal investing decisions, because they lack diversification as their wealth is put in
one firm, which may hamper the firm’s performance. In fact, concentrated ownership not
only allows large shareholders to pursue their own interest but also protects management
from external corporate control mechanisms such as takeover, tender offers and poor
management entrenchment, as well (Stulz, 1988; Barclay and Holderness, 1989). Therefore, it
is suggested that ownership concentration intensifies agency problems within the firm, and
increases its risks and CoD. Moreover, Mueller and Inderst (2001) suggest that concentrated
ownership is positively related to agency CoD. For instance, large shareholders can
expropriate creditors by undertaking excessive risks that would adversely impact creditors
since all the rewards would be captured by shareholders while losses are shared with
creditors ( Jensen and Meckling, 1976; Bebchuk, 1999). Aware of and anticipating all these
contingencies, creditors would harden their credit terms and require a higher rate of return.
Hence, our opposing hypothesis suggests that ownership concentration raises the risks
perceived by creditors, which should result in a positive relationship between ownership
concentration and CoD.
The literature is inconclusive about the impact of ownership concentration on CoD. It is
incapable of demonstrating whether the benefits of the monitoring exercised by large
shareholders outweigh the negative effects associated with concentrated ownership (Hu and
Izumida, 2008). Hence, it is interesting to test this relationship in a new market to seek new
evidence on the nature of this relationship.

3. Methodology
3.1 Sampling
The objective of this study is to explore the relationship between ownership concentration
and CoD in the emerging market of CSE. The study includes all firms listed on the CSE, with
the exception of the financial ones due to their special financial structures, accounting
methods and corporate governance (Berger et al., 1997). Our final sample contains 589 firm-
RBF year observations and covers the period between 2004 and 2016. The choice of this time
12,3 frame allows us to grasp the impact of recent changes affecting the CSE and conduct a pre-
and post-crisis analysis. Data on ownership structures are obtained from the CSE.
DataStream and WorldScope were used to extract the remaining data needed ( for more
details see Table AI).
Data and variable construction. The following section presents all the variables used in
286 this study and their relevance. As the two hypotheses imply, our dependent and
independent variables are, respectively, the CoD and ownership concentration. To hedge
against any biases resulting from the differences in firms’ unique characteristics, control
variables were employed. Table AI presents all the variables in more detail.
Dependent variable:
• CoD: we measure CoD as the interest rate on the firm’s debt, which is equal to
interest expense net of capitalized interest for the year divided by average short-
and long-term debt for the year ( Jabbouri and El Attar, 2017; Farooq and Jabbouri,
2015; Francis et al., 2005; Pittman and Fortin, 2004; Piot and Missonier-Piera, 2007;
Zhu, 2009).
Independent variable:
• Ownership concentration: Parrino et al. (2003) and other authors (Moh’d et al., 1998;
Cornett et al., 2003; Bhojraj and Sengupta, 2003; Roberts and Yuan, 2010) measure
ownership concentration (OwnershipConcentration) by calculating the percentage
claims of major investors. They define a major investor as an investor owning more
than 5 percent of the total shares of a company[2].
Control variables. Aware of the effects that firm-specific characteristics may have on our
results, we include a number of relevant control variables:
• Leverage: financial leverage (Leverage) has a significant impact on CoD (Merton,
1974; Hubbard et al., 2002; Johnson, 2003). Similar to Roberts and Yuan (2006), we
measure financial leverage (Leverage) using debt to equity ratio.
• Profitability: generally, profitable firms are expected to have a lower default risk,
which reassures creditors to grant them loans at a lower cost. Similar to Deng et al.
(2007), we measure profitability (Profitability) using the return on assets ratio.
• Risk: In the financial literature, debt rating is used to measure a firm’s default risk;
however, the data are not available in the Moroccan market. Following Hamada
(1972) and Long and Malitz (1985), β is used to capture the firm’s business
risk (Risk).
• Liquidity: we include liquidity (Liquidity) in the analysis because of its impact on the
CoD. Firms with better liquidity tend to have a lower CoD (Baker and Bloom, 2013;
DeAngelo et al., 2004; Khang and King, 2006). Current ratio is used to account for the
effect of firm’s liquidity on CoD.
• Firm size: compared to smaller firms, bigger firms have a larger asset base that can
be used as a collateral, which reduces their riskiness and hence their CoD. To
measure firm size (FirmSize), we use the natural logarithm of total assets (Moh’d
et al., 1998; Roberts and Yuan, 2006; Titman and Wessels, 1988; Villalonga and
McGahan, 2005).
• Growth opportunities: growth opportunities (GrowthOp) are considered by scholars
as a main determinant of CoD (Moh’d et al., 1998; Myers, 1977; Rozeff, 1982;
Villalonga and McGahan, 2005). Growth firms are in a better position to honor their
 debt obligations, so we expect their CoD to be lower than other firms. The proxy used Ownership
to account for growth opportunities is the asset growth ratio (Manos, 2003; Moh’d concentration
et al., 1998).
Descriptive statistics. Panel A of Table I presents the descriptive statistics for CoD,
ownership concentration and control variables, respectively, during our sampling period
(2004–2016). Panel B of Table I displays the correlation matrix and shows a low pairwise
correlation among all the explanatory variables. The highest correlations are between firm 287
size and leverage (0.1621) and between profitability and growth opportunities (0.1377). This
analysis demonstrates that our sample is free from multicollinearity.

4. Empirical procedure
In order to examine the effects of ownership concentration on CoD, a panel data analysis is
employed. The analysis produced two regressions: fixed and random effects models.
Hausman test was used to select the most appropriate model. The basic regression takes the
following form.
The following equation tests the relationship between CoD and ownership concentration:
CoDit ¼ ai þb1 Ownership Concentrationit þb2 Leverageit þb3 Profitit þb4 Riskit
þb5 Liquidityit þb6 Firm Sizeit þb7 Growth Opportunitiesit þ b8 Industry dummiesit

þ b9 Year dummiesit þmit ; (1)

In this equation, the subscripts i and t represent the cross-sectional and the time dimension
of our data, respectively. The results of the analysis are reported in Table II.

5. Results and discussion

Hausman test was used to select between the fixed effects and random effects models.
Based on its results, the fixed effects model appears to be the most appropriate. Our
analysis reports a significant positive relationship between CoD and ownership
concentration at the 5 percent level. The negative impact of ownership concentration on

Panel A: descriptive statistics for the dependent, independent and control variables
Variable Mean SD
Cost of debt 0.0667 0.0273
OwnershipConcentration 0.6593 0.2108
Leverage 22.3512 7.0482
Profit 13.7431 4.6831
Risk 1.1202 0.4010
Liquidity 1.1432 0.3034
FirmSize 13.6903 7.0121
GrowthOp 16.4010 7.9892
Panel B: correlation matrix
Leverage Profitability Risk Liquidity FirmSize GrowthOp Ownership
Concentration
Leverage 1
Profitability 0.0255 1
Risk 0.0587 0.0102 1
Liquidity 0.0121 0.0098 −0.0471 1 Table I.
FirmSize 0.1403 0.0666 −0.0043 0.0781 1 Descriptive statistics
GrowthOp −0.0351 0.1684 0.0905 −0.0261 0.0733 1 and the
OwnershipConcentration 0.1987 0.2003 0.0208 0.0018 0.3151 0.2198 1 correlation matrix
RBF COD Coef. t P W |t| Level of significance
12,3
OwnershipConcentration 0.0519 1.97 0.049 **
Leverage 0.1196 3.63 0.000 ***
Profit −0.0014 −1.27 0.204
Risk 0.1835 3.70 0.000 ***
Liquidity 0.0104 0.69 0.488
288 FirmSize −1.0361 −2.66 0.008 ***
GrowthOp −0.0935 −0.83 0.405
Constant 17.8631 2.59 0.010 ***
Table II.
Relationship between Number of observations 589
cost of debt and Adjusted R2 0.4642
ownership Notes: Fixed effect model of the panel regression (2004–2016). **,***Significant at the 5 and 1 percent
concentration levels, respectively

CoD suggests that the presence of ownership concentration affects negatively the
governance environment of the firm, hence increases its riskiness and CoD. Our result
supports the notion that concentrated ownership is associated with weak monitoring or
prioritizing its controlling shareholders’ private benefits at the expense of minority
shareholders’ and creditors’ interests (Agrawal and Knoeber, 1996; Claessens et al., 2002;
Mueller and Inderst, 2001). Furthermore, this finding opposes previous studies that
suggest that large shareholders discipline managers, protect the interests of outside
investors (Gomes, 2000; La Porta et al., 1999; Burkart et al., 2003) and strain to establish a
good reputation of their firm in the debt market (Anderson et al., 2003). Our empirical
evidence, supported by our theoretical analysis, indicates the significant negative
influence of dominant shareholders on firm’s CoD. Tunneling and expropriating firm’s
resources by self-serving large shareholders are potential nefarious activities that increase
corporate credit risk and result in a higher CoD. This finding documents the severity of
agency problems inside the CSE and urges regulators to undertake the necessary
measures to improve investors’ protection and restore confidence in the local market.
Failing to do so could entail serious repercussions ranging from the inefficient allocation
of resources in the economy to the destruction of shareholder value.

5.1 Pre- and post-crisis analysis

Financial crises usually shape investors’ decisions and behaviors as well as controlling
shareholders’ attitudes and priorities. These changes are expected to have a predominant
impact on the nature of the relationship between ownership concentration and CoD.
Previous research documents that the incentives of controlling shareholders to tunnel
resources increase during economic downturns. Cheung et al. (2015) explore when and
why controlling shareholders expropriate outside investors. Their results reveal that more
tunneling out of publicly listed firms occur when its controlling shareholders are
underperforming. It is argued that as returns drop, controlling shareholders attempt to
increase their yields by expropriating outside investors ( Johnson et al., 2000; Mitton, 2002;
Baek et al., 2004). In the absence of decent governance mechanisms, controlling
shareholders may extract excess cash accumulated by firms during growth periods for
their own private benefits to boost their returns drastically slashed by the economic
downturn (Bae et al., 2012).
To explore the impact of the financial crisis on the relationship between ownership
concentration and CoD, and unveil the hidden aspects of this relationship we conduct a
pre–post-crisis analysis. We divide the period of the study into two sub-periods: a pre-
crisis period (2004–2007) and a post-crisis period (2009–2016). The Federal Reserve Board
of St Louis (2009) and the Bank for International Settlements (2009) identify 2008 Ownership
as the year in which the “initial financial turmoil” occurred in international markets, concentration
followed by the period of sharp financial market deterioration. Figure 1 displays the
decline that the Moroccan stock exchange index suffered from during the 2008 financial
crisis. At the end of 2016, the Moroccan stock market has still not fully recovered from the
crisis. In fact, MASI (Moroccan All Share Index), the Moroccan main market index, was at
11,644 points at the end of 2016, which is below its pre-crisis level at the end of 2007 of 289
12,694 points.
Parallel to the initial analysis, Equation (1) is re-estimated for the pre-crisis (2004–2007)
and the post-crisis periods (2009–2016). Hausman test shows that the fixed effect model is
the most appropriate.

5.2 Results for the pre and post-crisis periods

The results of the pre–post-crisis analysis presented in Table III are very interesting. The
findings reveal a significant negative relationship between ownership concentration and
CoD in the pre-crisis period at the 5 percent level. This negative relationship shows the
positive impact that concentrated ownership extends on the firm’s governance
environment. The monitoring exercised by controlling shareholders appears to improve
with an increase in their holdings. Moreover, when their investment is considerable,
majority shareholders pursue other strategies than an exit strategy because the
liquidation of large holdings becomes costly and value destroying. Therefore, we argue
that the added value exceeds the costs incurred and resources committed to implement an
efficient monitoring when the amount at stake is significant. Creditors on the other hand
seem to value the improvement of governance environment and respond positively by
requiring a lower rate of return.
Captivatingly, the relationship between ownership concentration and CoD appears to
reverse in the post-crisis period, a period characterized by lackluster market conditions.
The post-crisis analysis demonstrates a positive relationship between ownership
concentration and CoD, which is significant at the 1 percent level. We document a change
in the behavior of controlling shareholders from guardians of decent governance in the
pre-crisis period to a menace to outside investors’ interests in the post-crisis period.
Several studies contend that controlling shareholders’ incentives to expropriate outside
investors are likely to increase as the expected return on investment falls ( Johnson et al.,
2000; Mitton, 2002; Baek et al., 2004; Friedman et al., 2003; Lemmon and Lins, 2003). In the
same line, Bae et al. (2012) developed and tested a model that investigates how controlling
shareholders’ incentives for expropriation affect a firm’s value during recovery periods
following a financial crisis. They found that Asian firms suffered most expropriation

400
350 Pre-crisis Period
300
250
200
Post-crisis Period
150
100
50 Figure 1.
Evolution of the
0 Moroccan market
January 1, January 1, January 1, January 1, January 1, index
2006 2007 2008 2009 2010
RBF COD Coef. t p W |t| Level of significance
12,3
Panel A: pre-crisis period (2004–2007)
Ownership Concentration −0.0225 −2.45 0.015 **
Leverage 0.0781 7.38 0.000 ***
Profit 0.0008 1.01 0.313
Risk 0.1026 1.82 0.070 *
290 Liquidity 0.0562 4.37 0.000 ***
FirmSize −2.1570 −7.87 0.000 ***
GrowthOp −0.0002 −1.67 0.096 *
Constant 18.0184 156.98 0.000 ***
Number of observations 148
2
Adjusted R 0.4372
Panel B: post-crisis period (2009–2016)
Ownership Concentration 0.0095 2.83 0.005 ***
Leverage 0.0937 1.92 0.055 *
Profit −0.0012 −1.09 0.278
Risk 0.0409 9.82 0.000 ***
Table III. Liquidity −1.2711 2.82 0.005 ***
Relationship between FirmSize −1.4568 −3.31 0.001 ***
cost of debt and
GrowthOp −0.0152 −0.32 0.747
ownership
concentration: pre– Constant 29.6433 3.82 0.000 ***
post-crisis analysis; Number of observations 391
2
fixed effect model of Adjusted R 0.4792
the panel regression Note: *,**,***Significant at the 10, 5 and 1 percent levels, respectively

following the 1997 Asian financial crisis where assets and profits were tunneled out of
companies by controlling shareholders to elude the claims of creditors ( Johnson et al.,
2000). Similar results were reported for Latin American firms following the 2001
Argentinian economic crisis (Bae et al., 2012). Therefore, we argue that a significant drop
in returns can trigger a change in the behavior of controlling shareholders who, to
maintain their private interests, would switch from protecting to misusing the firm’s
resources. The mindful of these potential conflicts of interest that may adversely affect
the riskiness of the firm, creditors anticipate this shift in major shareholders’ behavior
and respond proactively by revising the credit analysis and requiring a higher rate on
their investments.
The findings of this analysis confirm the severity of agency problems in the
Moroccan market and identify aspects in which emerging financial markets in general
and CSE in particular can improve to promote market integrity, boost investment
transparency, and economic growth. Fundamental measures have to be implemented
to address the prevailing governance issues, protect outside investors and alleviate
insiders’ expropriation.

6. Robustness check
The objective of this section is to test whether the previous results are robust to changes in
the proxy of our independent variable: ownership concentration. Therefore, and similar to
Cheung et al. (2015), we use the percentage of ownership by the largest shareholder as the
proxy of ownership concentration. Similar to the initial analysis, two regressions were
produced: the fixed effects and the random effects models, for the whole sample period –
pre- and post-crisis periods. The results of the robustness check are consistent with the
previous findings in terms of significance and correlation between ownership identity and
CoD, which implies that the prior results are robust to a change in the proxy.
7. Summary and conclusions Ownership
This research examines how ownership concentration affects CoD in the emerging market concentration
of Morocco. The study employs data of non-financial firms listed on CSE spanning the
period from 2004 to 2016. The results of the study reveal that the presence of ownership
concentration is associated with a higher CoD. Absence of or weak monitoring and
tunneling the firm’s resources are potential actions by self-serving major shareholders that
increase corporate credit risk and explain the positive relationship between ownership 291
concentration and CoD.
In order to uncover the hidden facets of the relationship between ownership
concentration and CoD, a pre- and post-crisis analysis is performed. In the pre-crisis period,
the results show a significant negative relationship between ownership concentration and
CoD. This finding denotes the positive impact that concentrated ownership extends on the
firm’s governance environment, which reduces the riskiness of the firm and justifies a lower
CoD. However, this relationship between concentrated ownership and CoD seems to reverse
in the post-crisis period, a period characterized by lackluster market conditions. Thus, we
document a change in the behavior of controlling shareholders from advocates of proper
governance and protectors of outside investors’ interests in the pre-crisis period to a menace
to outside investors’ interests in the post-crisis period. We argue that this change in the
behavior of controlling shareholders is driven by a drop in their returns. In their attempts to
increase their returns adversely affected by the financial crisis, controlling shareholders
switch from protecting to misusing the firm’s resources. Creditors anticipate this shift in
major shareholders’ behavior and respond proactively by re-assessing the riskiness of the
firm and requiring a higher yield on their investments.
Our findings shed light on the poor quality of corporate governance in emerging
markets in general and Morocco in particular. Despite the substantial efforts made by the
Moroccan authorities to improve the governance environment of CSE, additional efforts
are to be made to strengthen country-level governance mechanisms in order to improve
investors’ protection and restore the integrity of the local market. We believe it is the duty
of all market participants, namely, regulators, board of directors, financial analysts,
shareholders and creditors to scrutiny and reinforce governance mechanisms to alleviate
expropriation by the controlling shareholders. Improving country and firm-level
governance mechanisms would enhance investors’ protection, attract international
investors and boost the economic activity.
A potential limitation of this study is the exclusion of variables that may have a
significant impact on CoD such as the quality of corporate governance, the quality of
collateral and loan covenants. The inclusion of these variables would improve the quality of
our results. Indeed, the unavailability of this data in the Moroccan market was the main
reason for the exclusion of these variables.
Future research could investigate other markets to gain a more complete understanding
of how ownership concentration affects CoD. A cross-country comparison would bring
additional insights by identifying the impact of country-specific factors on the nature of this
relationship. Furthermore, large investors differ in terms of investment horizon, objectives,
constraints and activity level, which may have a direct effect on the level of their activism
(Larcker and Tayan, 2011). Thus, future research could examine the impact of the identity or
type of the major shareholder on CoD.

Notes
1. Roberts and Yuan (2010), Bhojraj and Sengupta (2003), Cornett et al. (2003), Parrino et al. (2003) and
Moh’d et al. (1998) define large shareholder as a shareholder holding more than 5 percent of the
total shares of a company.
RBF 2. We would like to mention that an average Moroccan firm is owned and controlled by
12,3 a single entity. During our sample period, there was not a single year when the average
holding of the largest shareholder dropped below 50 percent. More specifically, average holding
of the largest shareholder in Moroccan firms was as follows during our sample period:
58.77 percent in 2004, 53.83 percent in 2005, 55.41 percent in 2006, 56.39 percent in 2007,
57.18 percent in 2008, 58.31 percent in 2009, 59.44 percent in 2010, 57.55 percent in 2011,
59.06 percent in 2012, 57.81 percent in 2013, 57.90 percent in 2014, 56.12 percent in 2015 and
292 56.53 percent in 2016.

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Further reading
Becht, M., Franks, J., Mayer, C. and Rossi, S. (2008), “Returns to shareholder activism: evidence from a
clinical study of the Hermes UK Focus Fund”, Review of Financial Studies, Vol. 22 No. 8,
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Applied Corporate Finance, Vol. 11 No. 3, pp. 40-48.
RBF Appendix
12,3

Variable Measurement Source

Cost of Debt Interest expense over interest bearing liability DataStream

Ownership concentration Percentage of stake of the major shareholder. Casablanca Stock Exchange
296 Percentage difference of stake between the first
and the second major owner
Type of owners Type of owner dummy Casablanca Stock Exchange
Leverage Debt to equity ratio WorldScope
Profit ROA DataStream
Table AI. Liquidity Current ratio DataStream
Definition and sources Firm size Natural log of total assets: Ln (Total assets) DataStream
of the variables Growth opportunities Asset growth ratio WorldScope

Corresponding author
Imad Jabbouri can be contacted at: i.jabbouri@aui.ma

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