Ownership, Liquidity, and Investment
Rand Journal of Economics
Posted: 10 Apr 1998
This paper documents a nonlinear relationship between insider shareholdings and the sensitivity of a firm's investment to its cash flow. As insider holdings increase from 0, investment-cash flow sensitivities rise sharply. This relationship weakens at higher levels of insider ownership, and I find some evidence that investment-cash flow sensitivities decrease slowly with insider holdings after a certain point. I argue that these results are inconsistent with the hypothesis that free cash flow problems cause the widely noted sensitivity of investment to cash flow. The results are consistent with the presence of asymmetric information problems in the capital markets that are heightened when managers have a strong incentive to maximize shareholder returns.
JEL Classification: G32, G31, D92
Suggested Citation: Suggested Citation