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Ownership structure, cash flow, and capital investment: Evidence from East Asian economies before the financial crisis

  • Wei, K.C. John
  • Zhang, Yi
Registered author(s):

    Using financial and ownership data from eight East Asian emerging markets before the Asian financial crisis, we document that while the sensitivity of a firm's capital investment to its cash flow decreases as the cash-flow rights of its largest shareholders increase, this sensitivity increases as the degree of the divergence between the control rights and cash-flow rights of the firm's largest shareholders increases. We interpret the results to be consistent with the free cash-flow hypothesis, which postulates that too much free cash flow in the hands of entrenched managers is likely to lead to overinvestment. This is particularly true for firms with the greatest divergence between the largest shareholders' control rights and their cash-flow rights and for firms with lower profitability.

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    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 14 (2008)
    Issue (Month): 2 (April)
    Pages: 118-132

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    Handle: RePEc:eee:corfin:v:14:y:2008:i:2:p:118-132
    Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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