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Ownership, Liquidity, and Investment

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  • Charles J. Hadlock
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    Abstract

    This article documents a nonlinear relationship between insider shareholdings and the sensitivity of a firm's investment to its cash flow. As insider holdings increase from zero, investment-cash flow sensitivities rise sharply. This relationship weakens at higher levels of insider ownership, and I find some evidence that investment-cash flow sensitivities decrease slowly with insider holdings after a certain point. I argue that these results are inconsistent with the hypothesis that free-cash-flow problems cause the widely noted sensitivity of investment to cash flow. The results are consistent with the presence of asymmetric-information problems in the capital markets that are heightened when managers have a strong incentive to maximize shareholder returns.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 29 (1998)
    Issue (Month): 3 (Autumn)
    Pages: 487-508

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    Handle: RePEc:rje:randje:v:29:y:1998:i:autumn:p:487-508

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    Cited by:
    1. Tyrowicz, Joanna, 2007. "Blame No One? Investment Decisions of the Polish Stock-listed Companies," MPRA Paper 15199, University Library of Munich, Germany.
    2. Heitor Almeida & Murillo Campello & Antonio F. Galvao Jr., 2010. "Measurement Errors in Investment Equations," NBER Working Papers 15951, National Bureau of Economic Research, Inc.
    3. John Hutchinson & Ana Xavier, 2006. "Comparing the Impact of Credit Constraints on the Growth of SMEs in a Transition Country with an Established Market Economy," Small Business Economics, Springer, Springer, vol. 27(2), pages 169-179, October.
    4. Chen, Alex A. & Cao, Hong & Zhang, Dayong & Dickinson, David G., 2013. "The impact of shareholding structure on firm investment: Evidence from Chinese listed companies," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 25(C), pages 85-100.
    5. Curtiss, Jarmila & Ratinger, Tomas & Medonos, Tomas, 2012. "Ownership and Investment Behaviour in Transition Countries: A Case Study of Collective and Corporate Farms in the Czech Republic," Working Papers, Factor Markets, Centre for European Policy Studies 122841, Factor Markets, Centre for European Policy Studies.
    6. Sarmistha Pal, 2005. "Do External Funds Yield Lower Returns? Recent Evidence From East Asian Economies," Development and Comp Systems, EconWPA 0512021, EconWPA.
    7. Francis, Bill & Hasan, Iftekhar & Song, Liang & Waisman, Maya, 2013. "Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets," Emerging Markets Review, Elsevier, Elsevier, vol. 15(C), pages 57-71.
    8. Mykhayliv, Dariya & Zauner, Klaus G., 2013. "Investment behavior and ownership structures in Ukraine: Soft budget constraints, government ownership and private benefits of control," Journal of Comparative Economics, Elsevier, vol. 41(1), pages 265-278.
    9. Yuanyao Ding & Xu Qian, 2014. "Investment Cash Flow Sensitivity and Effect of Managers’ Ownership: Difference between Central Owned and Private Owned Companies in China," International Journal of Economics and Financial Issues, Econjournals, Econjournals, vol. 4(3), pages 449-456.
    10. MORIKAWA Masayuki, 2012. "Financial Constraints in Intangible Investments: Evidence from Japanese firms," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 12045, Research Institute of Economy, Trade and Industry (RIETI).
    11. Carlos Carreira & Filipe Silva, 2013. "Do Size, Age and Dividend Policy Provide Useful Measures of Financing Constraints? New Evidence from a Panel of Portuguese Firms," GEMF Working Papers, GEMF - Faculdade de Economia, Universidade de Coimbra 2013-26, GEMF - Faculdade de Economia, Universidade de Coimbra.
    12. Özgür Arslan-Ayaydin & Chris Florackis & Aydin Ozkan, 2014. "Financial flexibility, corporate investment and performance: evidence from financial crises," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 42(2), pages 211-250, February.
    13. Degryse, H. & de Jong, A., 2001. "Investment and Internal Finance: Asymmetric Information or Managerial Discretion?," ERIM Report Series Research in Management, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm ERS-2001-86-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    14. Bogdan Dima & Alin Ionescu & Petru Tudoreanu, 2013. "Corporate Governance And Financial Structures Of Companies In Developing Countries," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(15), pages 14.

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