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

Park, Jin Ho; Park, Kwangwoo; Ratti, Ronald A.

doi:10.2139/ssrn.2165611

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

KAIST College of Business Working Paper Series No. 2012-009

38 Pages Posted: 23 Oct 2012

See all articles by Jin Ho Park

Kwangwoo Park

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

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: 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 College of Business Working Paper Series No. 2012-009, Available at SSRN: https://ssrn.com/abstract=2165611 or http://dx.doi.org/10.2139/ssrn.2165611