Ownership Structure and Corporate Investment Policy
The present study investigates the association between ownership concentration and over-investment. The empirical results show a non-linear relationship between ownership concentration and over-investment. An important implication of this research is that controlling shareholders may play either an expropriation or monitoring role. In line with the agency theory, concentrated ownership enables controlling shareholders to pursue their self-interests through over-investment. However, when ownership concentration is beyond an optimum level, controlling shareholders have less incentive to carry out sub-optimal investment decisions. Our findings corroborate the need to account for non-linearity when investigating the influence of ownership concentration on investment expenditures. The estimation results further show that over-investment is sensitive to FCF; however, the extent of over-investment of FCF is lower in the presence of family control. Our results clarify the influence of family control on over-investment and show that family controlled firms have lower (higher) levels of over-investment than their counterparts do when free cash flow is at high (low) levels. Various robustness checks, including alternative regression estimation models and different proxies, have been conducted to address the endogeneity problem using 2SLS and Fama–MacBeth regressions and the non-linearity issue of ownership-decision association.
Keywords- Over-investment; Ownership structure; Self-interests; JEL Classifications: G32; G34; M4