Corporate Control and Underinvestment

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    This paper reports a study of how the benefits that large shareholders derive from their control of a firm affect the equity issue and investment decisions of the firm. I introduce an explicit agency cost structure based on the benefits of control of the largest shareholder. In a simple extension of the model developed by Myers and Majluf (J Financial Econ 13:187–221, 1984), I show that underinvestment is aggravated when there are benefits of being in control and these benefits are diluted if equity is issued to finance an investment project. Using a large panel of US data, I find that the concerns of large shareholders about the dilution of ownership and control cause firms to issue less equity and to invest less than would otherwise be the case. I also find that it makes no significant difference whether new shares are issued to old shareholders or new shareholders.
    TidsskriftJournal of Management & Governance
    Udgave nummer1
    Sider (fra-til)131-155
    Antal sider25
    StatusUdgivet - 2013

    Bibliografisk note

    Published online: 13 April 2011


    • Equity Issue
    • Underinvestment
    • Private Benefits of Control
    • Potential loss of Control
    • Voting power