Ownership structure and financial constraints : evidence from a structural estimation

Chen LIN, Yue MA, Yuhai XUAN

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

42 Citations (Scopus)

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 languageEnglish
Pages (from-to)416-431
Number of pages16
JournalJournal of Financial Economics
Volume102
Issue number2
DOIs
Publication statusPublished - 1 Nov 2011

Fingerprint

Ownership structure
Financial constraints
Structural estimation
Control rights
Divergence
External finance
Insider
Ownership
Insider control
Misreporting
Institutional ownership
Cash flow rights
Agency problems
Euler equations
Opacity
Generalized method of moments

Keywords

  • Financial constraints
  • Insider excess control rights
  • Ownership structure

Cite this

LIN, Chen ; MA, Yue ; XUAN, Yuhai. / Ownership structure and financial constraints : evidence from a structural estimation. In: Journal of Financial Economics. 2011 ; Vol. 102, No. 2. pp. 416-431.
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Ownership structure and financial constraints : evidence from a structural estimation. / LIN, Chen; MA, Yue; XUAN, Yuhai.

In: Journal of Financial Economics, Vol. 102, No. 2, 01.11.2011, p. 416-431.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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AB - 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.

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