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A New Relationship between Ownership–Control Wedge and Overinvestment Practices: Evidence from Korean Business Groups (Chaebol)
Author(s) -
Goh Jaimin,
Lee Jaehong,
Cho Jungeun
Publication year - 2016
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12128
Subject(s) - shareholder , business , incentive , wedge (geometry) , chaebol , cash flow , companies act , monetary economics , control (management) , corporate governance , accounting , finance , market economy , economics , corporate law , management , physics , optics
This study examines the effects of controlling shareholders’ ownership–control wedge on firms’ overinvestment practices. In addition, it further investigates the incentive effects of controlling shareholders’ cash flow rights on firms’ overinvestment. We find a non‐monotonic relation between controlling shareholders’ ownership–control wedge and a firm's overinvestment. Specifically, the relation between controlling shareholders’ wedge and overinvestment is significant for certain wedge levels. Thus we conclude that controlling shareholders with certain levels of wedge expropriate minority shareholders’ benefits since the marginal benefit exceeds the marginal cost. We also document that cash flow rights are effective to reduce a firm's overinvestment to certain levels.