EconPapers    
Economics at your fingertips  
 

Financing constraints and the cost of equity: Evidence on the moral hazard of the controlling shareholder

Qi Luo, Hui Li and Biao Zhang

International Review of Economics & Finance, 2015, vol. 36, issue C, 99-106

Abstract: This study examines the financial consequences of the moral hazard of the controlling shareholder. Using a sample of Chinese listed companies during the 2003–2009 period, we find that companies characterized by a wider divergence between the controlling shareholder's control and cash flow rights have a significantly higher cash flow sensitivity of cash. This result is consistent with the argument that the agency problem between the controlling shareholder and minority shareholders induces financing constraints. We also find that the divergence of the control and cash flow rights increases the cost of equity, suggesting that minority shareholders take into account the moral hazard of the controlling shareholder and demand higher risk premium. Our results imply that the moral hazard of the controlling shareholder prevents a firm from funding all its desired investments and that minority shareholders discount the terms at which they are willing to provide financing.

Keywords: Moral hazard; Controlling shareholder; Financing constraints; Cost of equity (search for similar items in EconPapers)
JEL-codes: G30 G31 G32 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056014001841
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:36:y:2015:i:c:p:99-106

DOI: 10.1016/j.iref.2014.11.010

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Haili He ().

 
Page updated 2020-05-02
Handle: RePEc:eee:reveco:v:36:y:2015:i:c:p:99-106