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Ownership structure, overinvestment and underinvestment: Evidence from Brazil

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  • Pellicani, Aline Damasceno
  • Kalatzis, Aquiles Elie Guimarães

Abstract

This paper examines whether investment-cash flow sensitivity is due to underinvestment problems caused by asymmetric information, or if it is due to overinvestment problems motivated by the use of free cash flows on unprofitable investment projects. Using a sample of 485 Brazilian firms over the period of 1997 to 2007, the results show that both underinvestment and overinvestment problems are related to the active presence of the largest ultimate shareholder on the board and the executive director. The sample was split in accordance with the presence of financial constraints (measured by the KZ index) and investment opportunities (measured by Tobin’s q). The results indicate that financially constrained firms and firms with high investment opportunities suffer from underinvestment, while financially unconstrained firms and firms with low investment opportunities suffer from overinvestment problems.

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  • Pellicani, Aline Damasceno & Kalatzis, Aquiles Elie Guimarães, 2019. "Ownership structure, overinvestment and underinvestment: Evidence from Brazil," Research in International Business and Finance, Elsevier, vol. 48(C), pages 475-482.
    • Handle: RePEc:eee:riibaf:v:48:y:2019:i:c:p:475-482
    DOI: 10.1016/j.ribaf.2018.10.007
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