Investment Propensity Of Controlling Shareholders And The Financial Constraints Of A Firm
This paper examines the effect of ownership structure of a controlling shareholder on the financial constraints of non-financial firms in 22 countries between 1982 and 2009. Using firm-level panel data the authors analyze financial constraints with the Euler equation derived from a dynamic investment model. Through Generalized Method of Moments (GMM) estimation of the investment Euler equation, they find that the overinvestment propensity of a controlling shareholder becomes less severe as he has higher cash-flow rights, which makes a firm less financially constrained. They also find that the overinvestment propensity becomes less severe as he has a higher divergence between control rights and cash-flow rights, which makes a firm less financially constrained.