Effect of Ownership Structure on Underinvestment and Overinvestment: Empirical Evidence from Spain

21 Pages Posted: 20 May 2009

See all articles by Julio Pindado

Julio Pindado

University of Salamanca - Administration and Business Economics

Chabela de la Torre

University of Salamanca - Administration and Business Economics

Date Written: 2008-08-14

Abstract

This paper investigates how ownership affects the investment-cash flow sensitivity by taking into account the non-linearities of ownership with respect to firm value, and using a free cash flow index and a criterion for financial constraints to disentangle underinvestment and overinvestment. Interesting results are provided by estimating using the Generalized Method of Moments to eliminate the endogeneity problem. The alignment of interests between owners and managers and the monitoring by concentrated ownership both alleviate the sensitivity of investment to cash flow both in underinvestor and overinvestor firms. However, in the presence of controlling owners, underinvestment and overinvestment are exacerbated.

Suggested Citation

Pindado, Julio and de la Torre, Chabela, Effect of Ownership Structure on Underinvestment and Overinvestment: Empirical Evidence from Spain (2008-08-14). Accounting & Finance, Vol. 49, Issue 2, pp. 363-383, June 2009. Available at SSRN: https://ssrn.com/abstract=1407296 or http://dx.doi.org/10.1111/j.1467-629X.2008.00286.x

Julio Pindado (Contact Author)

University of Salamanca - Administration and Business Economics ( email )

Campus Miguel de Unamuno
Salamanca, ES-37007
Spain
+34 923 294640 (Phone)
+34 923 294715 (Fax)

Chabela De la Torre

University of Salamanca - Administration and Business Economics ( email )

Campus Miguel de Unamuno
Salamanca, ES-37007
Spain

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