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Controlling shareholders and financial constraints around the world

Jin Ho Park, Kwangwoo Park and Ronald Ratti

Managerial Finance, 2018, vol. 44, issue 1, 92-108

Abstract: Purpose - The purpose of this paper is to examine the effect of controlling shareholders’ ownership of firms on the firms’ financial constraints in 22 economies for the 1982-2009 period. Design/methodology/approach - The authors employ a generalized method of moments-based instrumental variables estimator to estimate empirical models. Findings - It found that the overinvestment propensity of controlling shareholders becomes less severe with an increase in cash-flow rights. It further indicates that a higher deviation between the control rights and cash-flow rights of controlling shareholders lower their overinvestment propensity, thereby lowering the firm’s financial constraints. Originality/value - The results suggest that a higher protective legal environment for minority shareholders blocks the entrenchment of controlling shareholders and thus benefitting the firm with slackened financing constraints in the given legal origin.

Keywords: Investment; Financial constraints; Ownership structure; Agency problem; Legal origin; C31; G32; G33; G34 (search for similar items in EconPapers)
Date: 2018
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