The 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.
The authors employ a generalized method of moments-based instrumental variables estimator to estimate empirical models.
It 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.
The 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.
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