Control-ownership wedge and investment sensitivity to stock price

Li Jiang, Jeong-Bon Kim and Lei Pang

Journal of Banking & Finance, 2011, vol. 35, issue 11, 2856-2867

Abstract: This study examines whether insiders' incentives for private control benefits affect investment sensitivity to stock price. While Chen et al. (2007) link stock price informativeness to firms' learning from the stock market, we offer an alternative agency-cost based explanation. Using a total of 2822 firms from 22 countries in East Asia and Western Europe, we document a strong negative association between control-ownership wedge and investment-q sensitivity, suggesting that insiders' incentives for private control benefit reduce their propensity to listen to the market. Furthermore, the negative impact of wedge on investment-q sensitivity is primarily driven by sub-optimal investments. Overall, we provide evidence that agency problem is an important factor that determines the learning from the stock market in capital allocation.

Keywords: Control-ownership; wedge; Investment-q; sensitivity; Corporate; investment (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (39)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:11:p:2856-2867

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