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Controlling shareholders and financial constraints around the world

Controlling shareholders and financial constraints around the world PurposeThe 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/approachThe authors employ a generalized method of moments-based instrumental variables estimator to estimate empirical models.FindingsIt 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/valueThe 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Controlling shareholders and financial constraints around the world

Managerial Finance , Volume 44 (1): 17 – Jan 8, 2018

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References (49)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0307-4358
DOI
10.1108/MF-08-2016-0228
Publisher site
See Article on Publisher Site

Abstract

PurposeThe 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/approachThe authors employ a generalized method of moments-based instrumental variables estimator to estimate empirical models.FindingsIt 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/valueThe 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.

Journal

Managerial FinanceEmerald Publishing

Published: Jan 8, 2018

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