Corporate control and underinvestment

Thomas Poulsen ()

Journal of Management & Governance, 2013, vol. 17, issue 1, 155 pages

Abstract: This paper reports a study of how the benefits that large shareholders derive from their control of a firm affect the equity issue and investment decisions of the firm. I introduce an explicit agency cost structure based on the benefits of control of the largest shareholder. In a simple extension of the model developed by Myers and Majluf (J Financial Econ 13:187–221, 1984 ), I show that underinvestment is aggravated when there are benefits of being in control and these benefits are diluted if equity is issued to finance an investment project. Using a large panel of US data, I find that the concerns of large shareholders about the dilution of ownership and control cause firms to issue less equity and to invest less than would otherwise be the case. I also find that it makes no significant difference whether new shares are issued to old shareholders or new shareholders. Copyright Springer Science+Business Media, LLC. 2013

Keywords: Equity issue; Underinvestment; Private benefits of control; Potential loss of control; Voting power; G31; G32 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s10997-011-9171-8

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