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Effect of ownership structure on underinvestment and overinvestment: empirical evidence from Spain

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This paper investigates how ownership affects the investment-cash flow sensitivity by taking into account the non-linearities of ownership with respect to firm value, and using a free cash flow index and a criterion for financial constraints to disentangle underinvestment and overinvestment. Interesting results are provided by estimating using the Generalized Method of Moments to eliminate the endogeneity problem. The alignment of interests between owners and managers and the monitoring by concentrated ownership both alleviate the sensitivity of investment to cash flow both in underinvestor and overinvestor firms. However, in the presence of controlling owners, underinvestment and overinvestment are exacerbated.
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Keywords: Expropriation; G31; G32; Managerial entrenchment; Overinvestment; Underinvestment

Document Type: Research Article

Affiliations: Department of Business Administration, University of Salamanca, Salamanca, E37007, Spain

Publication date: 01 June 2009

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