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The impact of shareholder intervention on overinvestment of free cash flow by overconfident CEOs

Title
The impact of shareholder intervention on overinvestment of free cash flow by overconfident CEOs
Authors
Kwon S.Ahn J.H.Kim G.H.
Ewha Authors
권세원
SCOPUS Author ID
권세원scopus
Issue Date
2021
Journal Title
International Review of Financial Analysis
ISSN
1057-5219JCR Link
Citation
International Review of Financial Analysis vol. 75
Keywords
CEO overconfidenceFree cash flowInvestment distortionInvestment-cash flow sensitivityShareholder intervention
Publisher
Elsevier Inc.
Indexed
SSCI; SCOPUS WOS scopus
Document Type
Article
Abstract
This paper examines the impact of shareholder intervention on investment distortions, which we capture using overinvestment of free cash flow by overconfident CEOs. Using this definition and U.S. data for 1996–2014, our fixed effects and difference-in-difference matching estimation results provide consistent evidence that the threat of potential intervention of shareholders can curb overinvestment by overconfident CEOs. Specifically, firms with greater voting premium and hedge fund activism experience less overinvestment and exhibit lower sensitivity of free cash flow to investment. Such disciplining effects are stronger for firms managed by overconfident CEOs. Overall, our results suggest that shareholder intervention is particularly effective at mitigating overinvestment that is more likely to be distorted. © 2021 Elsevier Inc.
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DOI
10.1016/j.irfa.2021.101751
Appears in Collections:
ETC > ETC
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