Abstract
This article examines the impact of the divergence between corporate insiders' control rights and cash-flow rights on firms' external finance constraints via generalized method of moments estimation of an investment Euler equation. Using a large sample of U.S. firms during the 1994-2002 period, we find that the shadow value of external funds is significantly higher for companies with a wider insider control-ownership divergence, suggesting that companies whose corporate insiders have larger excess control rights are more financially constrained. The effect of insider excess control rights on external finance constraints is more pronounced for firms with higher degrees of informational opacity and for firms with financial misreporting, and is moderated by institutional ownership. The results show that the agency problems associated with the control-ownership divergence can have a real impact on corporate financial and investment outcomes.
Original language | English |
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Pages (from-to) | 416-431 |
Number of pages | 16 |
Journal | Journal of Financial Economics |
Volume | 102 |
Issue number | 2 |
DOIs | |
Publication status | Published - 1 Nov 2011 |
Bibliographical note
We are grateful to Ben Esty, Stuart Gilson, Paul Gompers, Joy Ishii, Bill Schwert (the editor), Andrei Shleifer, Jeremy Stein, Belen Villalonga, and an anonymous referee for helpful suggestions and comments.Keywords
- Financial constraints
- Insider excess control rights
- Ownership structure