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Effect of ownership structure on underinvestment and overinvestment: empirical evidence from Spain
Author(s) -
Pindado Julio,
De La Torre Chabela
Publication year - 2009
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2008.00286.x
Subject(s) - endogeneity , cash flow , index (typography) , investment (military) , free cash flow , sensitivity (control systems) , economics , monetary economics , econometrics , microeconomics , business , value (mathematics) , cash , finance , statistics , electronic engineering , politics , world wide web , computer science , political science , law , engineering , mathematics
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.