Investment Propensity of Controlling Shareholders and Financial Constraints: Evidence around the World
38 Pages Posted: 23 Oct 2012
Date Written: October 1, 2012
This paper examines the effect of ownership structure of a controlling shareholder on the financial constraints of non-financial firms in 22 economies for the 1982-2009 period. We find that the overinvestment propensity of a controlling shareholder becomes less severe with an increase in cash-flow rights along with a greater deviation between control rights and cash-flow rights, which makes a firm less financially constrained. Our results suggest that firms in legal environment with stronger shareholder protections are less likely to have the entrenchment of the controlling shareholders, while minority shareholders in this legal origin benefit from loosened financial constraints.
Keywords: Ownership Structure, Agency Problem, Investment, Financial Constraints, Legal System
JEL Classification: C31, G32, G33, G34
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