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Investment decisions with benefits of control

Thomas Poulsen ()
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Thomas Poulsen: Department of Business Studies, Aarhus School of Business, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark, http://asb.dk/about/departments/bs/staff.aspx

No F-2008-02, Finance Research Group Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: This paper studies how large shareholders with bene…ts of control a¤ect …rms’ equity issue behavior and investment decisions. I introduce an explicit agency cost structure based on the large shareholder’s bene…ts of control. In a simple extension of Myers and Majluf [1984], I show that underinvestment is aggravated when there are bene…ts of being in control, and these bene…ts are diluted if equity is issued to …nance the investment project. I assume that large shareholders are constrained from further investments in their …rms, and that they maximize their own wealth, which includes the value of security bene…ts paid to all shareholders in proportion of ownership stake plus the value of private bene…ts from voting rights. Potential loss of control is calculated as the di¤erence in the largest shareholder’s voting power before and after a hypothetical equity issue. I use voting power as a representation of the large shareholders’expected private bene…ts. Using a large panel of U.S. data, I …nd that large shareholders’ concern with dilution of ownership and control cause …rms to issue less equity and to invest less. I also …nd that it has no signi…cant e¤ect whether new shares are issued to old shareholders or new shareholders.

Keywords: Underinvestment; equity issue; ownership structure; influence; voting power; private benefits of control; potential loss of control (search for similar items in EconPapers)
Pages: 41 pages
Date: 2008-03-19
New Economics Papers: this item is included in nep-cta and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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