Investment Propensity of Controlling Shareholders and Financial Constraints: Evidence around the World

38 Pages Posted: 23 Oct 2012

See all articles by Jin Ho Park

Jin Ho Park

Korea Energy Economics Institute (KEEI)

Kwangwoo Park

KAIST (Korea Advanced Institute of Science and Technology) - College of Business

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

Date Written: October 1, 2012

Abstract

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

Suggested Citation

Park, Jin Ho and Park, Kwangwoo and Ratti, Ronald A., Investment Propensity of Controlling Shareholders and Financial Constraints: Evidence around the World (October 1, 2012). KAIST Business School Working Paper No. 2012-009. Available at SSRN: https://ssrn.com/abstract=2165611 or http://dx.doi.org/10.2139/ssrn.2165611

Jin Ho Park

Korea Energy Economics Institute (KEEI) ( email )

405-11 Jongga-ro, Jung-gu
Ulsan, Ulsan 44543
Korea, Republic of (South Korea)

Kwangwoo Park (Contact Author)

KAIST (Korea Advanced Institute of Science and Technology) - College of Business ( email )

85 Hoegiro
Seoul 02455
Korea, Republic of (South Korea)
82-2-958-3540 (Phone)
82-2-958-3604 (Fax)

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

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