The impact of shareholder intervention on overinvestment of free cash flow by overconfident CEOs

Sewon Kwon, Jae Hwan Ahn and Gi H. Kim

International Review of Financial Analysis, 2021, vol. 75, issue C

Abstract: This paper examines the impact of shareholder intervention on investment distortions, which we capture using overinvestment of free cash flow by overconfident CEOs. Using this definition and U.S. data for 1996–2014, our fixed effects and difference-in-difference matching estimation results provide consistent evidence that the threat of potential intervention of shareholders can curb overinvestment by overconfident CEOs. Specifically, firms with greater voting premium and hedge fund activism experience less overinvestment and exhibit lower sensitivity of free cash flow to investment. Such disciplining effects are stronger for firms managed by overconfident CEOs. Overall, our results suggest that shareholder intervention is particularly effective at mitigating overinvestment that is more likely to be distorted.

Keywords: Investment-cash flow sensitivity; CEO overconfidence; Free cash flow; Investment distortion; Shareholder intervention (search for similar items in EconPapers)
JEL-codes: G3 M4 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:75:y:2021:i:c:s1057521921000934

DOI: 10.1016/j.irfa.2021.101751

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