Ownership Structure and Financial Constraints: Evidence from a Structural Estimation

44 Pages Posted: 16 Apr 2010 Last revised: 23 May 2011

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Yuhai Xuan

University of California, Irvine - Paul Merage School of Business

Date Written: July 1, 2010

Abstract

This article examines the impact of the divergence between corporate insiders' control rights and cash-flow rights on firms' external finance constraints via generalized method of moments estimation of an investment Euler equation. Using a large sample of U.S. firms during the 1994–2002 period, we find that the shadow value of external funds is significantly higher for companies with a wider insider control-ownership divergence, suggesting that companies whose corporate insiders have larger excess control rights are more financially constrained. The effect of insider excess control rights on external finance constraints is more pronounced for firms with higher degrees of informational opacity and for firms with financial misreporting, and is moderated by institutional ownership. The results show that the agency problems associated with the control-ownership divergence can have a real impact on corporate financial and investment outcomes.

Keywords: Ownership Structure, Insider Excess Control Rights, Financial Constraints

JEL Classification: G31, G32, G34

Suggested Citation

Lin, Chen and Ma, Yue and Xuan, Yuhai, Ownership Structure and Financial Constraints: Evidence from a Structural Estimation (July 1, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1590748

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/yuema24

Yuhai Xuan (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

4291 Pereira Drive
Irvine, CA California 92697-3125
United States

HOME PAGE: http://yuhai.merage.uci.edu/

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