TY - JOUR
T1 - Corporate Control and Underinvestment
AU - Poulsen, Thomas
N1 - Published online: 13 April 2011
PY - 2013
Y1 - 2013
N2 - 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.
AB - 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.
KW - Equity Issue
KW - Underinvestment
KW - Private Benefits of Control
KW - Potential loss of Control
KW - Voting power
UR - http://sfx-45cbs.hosted.exlibrisgroup.com/45cbs?url_ver=Z39.88-2004&url_ctx_fmt=info:ofi/fmt:kev:mtx:ctx&ctx_enc=info:ofi/enc:UTF-8&ctx_ver=Z39.88-2004&rfr_id=info:sid/sfxit.com:azlist&sfx.ignore_date_threshold=1&rft.object_id=954927385359&rft.object_portfolio_id=&svc.holdings=yes&svc.fulltext=yes
U2 - 10.1007/s10997-011-9171-8
DO - 10.1007/s10997-011-9171-8
M3 - Journal article
VL - 17
SP - 131
EP - 155
JO - Journal of Management & Governance
JF - Journal of Management & Governance
SN - 1385-3457
IS - 1
ER -