Control-ownership wedge and investment sensitivity to stock price

Jiang, Li; Kim, Jeong‐Bon; Pang, Lei

doi:10.1016/j.jbankfin.2011.03.017

Cited by 87 publications

(56 citation statements)

References 49 publications

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“…Using the average value of cash holdings of €161.9m, the 75th percentile value of Distance of 309.4 km (Table 1) In summary, our findings show that remotely located firms hoard more cash when excess control rights are high, in line with our predictions of hypothesis H2. Central to this is that separating cash-flow rights and control rights is closely associated with considerable monitoring costs by outsiders, thus providing the controlling shareholder with a greater ability to hoard cash for personal consumption (Jiang et al, 2011). Accordingly, accumulating cash in firms where remoteness from institutional investors and financial professionals is coupled with excess control rights may signal the relevance of agency problems in altering the management of cash.…”

Section: Cash = β0 + β1 Geographic Variables + β2 Geographic Variablementioning

confidence: 99%

Geographic location, excess control rights, and cash holdings

Boubaker

Derouiche²,

Lasfer

2015

International Review of Financial Analysis

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We assess the extent to which remotely-located firms are likely to discretionarily accumulate cash rather than distribute it to shareholders. We consider that these firms are less subject to shareholder scrutiny and, thus, will have high agency conflicts as the distance will facilitate the extraction of private benefits. Consistent with our predictions, we find a positive relation between the distance to the main metropolitan area and cash holdings, and this impact is more pronounced when the controlling shareholder has high levels of excess control rights (i.e., separation of cashflow rights and control rights). Our results hold even after accounting for all control variables, including financial constraints, and suggest that geographic remoteness can be conducive to severe agency problems, particularly when there is a large separation of cash-flow rights and control rights.JEL Classification: G30; G31; G32; G35.

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Section: Cash = β0 + β1 Geographic Variables + β2 Geographic Variablementioning

confidence: 99%

Geographic location, excess control rights, and cash holdings

Boubaker

Derouiche²,

Lasfer

2015

International Review of Financial Analysis

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“…The absence of profitable investment opportunities further increases the likelihood that controlling shareholders squander cash in empire building, negative net present value pet projects, excessive perquisites, and fringe benefits, thus deteriorating future firm profitability (Jensen (1986) Jiang et al (2011) argue that separating control and cash-flow rights is conducive to substantial monitoring costs by outsiders leading to sub-optimal investments and reduced learning from the stock market.…”

Section: A Control-ownership Wedge and The Value Of Cash Holdingsmentioning

confidence: 99%

Control–ownership wedge, board of directors, and the value of excess cash

Belkhir

Boubaker²,

Derouiche³

2014

Economic Modelling

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This study investigates the effects of the separation of control and ownership on the value of cash holdings in publicly listed French firms. It also sheds light on the role of board independence in such a relation. Theory suggests that investors are more likely to discount the value of excess cash held by firms with low corporate governance. Using the valuation regression of Fama and French (1998), empirical results show that the value of excess cash holdings decreases dramatically with the separation of control and cash-flow rights of the controlling shareholder. This value discount is, however, less pronounced in firms with more independent boards (i.e., boards with more independent directors and separate chief executive officer and chair positions). Our empirical findings support the argument that excess cash contributes less to firm value when minority shareholders are more likely to be expropriated by controlling shareholders. Independent boards seem to be effective in mitigating investors' concerns about the use of excess cash. Overall, the results provide compelling evidence that cash valuation is largely influenced by corporate governance quality in a concentrated ownership setting.

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“…In the real world, however, a firm's investment may become irresponsive to growth opportunities because of capital market frictions, leading to sub-optimal investments. 1 Prior research implies that a firm's investment sensitivity to stock price is determined by the extent of the firm's information asymmetry (Chen et al, 2007) and agency problems (Jiang et al, 2011). Building on these studies, we empirically examine the relation between ownership type and the sensitivity of firm investment to stock price (i.e., investment efficiency) for a large multinational sample of newly privatized firms (NPFs).…”

Section: Introductionmentioning

confidence: 99%

“…In line with recent investment literature (e.g., Chen et al, 2011;Jiang et al, 2011;McLean et al, 2012), we use the average Q as a proxy for marginal Q and employ the sensitivity of investment expenditure to Q as a proxy for investment efficiency. We argue that state and foreign institutional owners create different degrees of information asymmetry and agency problems, which lead to different investment behaviors.…”

Section: Introductionmentioning

confidence: 99%