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

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Ahn, Jae Hwan, Kim, Gi Hyun and Kwon, Sewon (2021) The impact of shareholder intervention on overinvestment of free cash flow by overconfident CEOs. International Review of Financial Analysis, 75 . 101751. doi:10.1016/j.irfa.2021.101751

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Official URL: http://dx.doi.org/10.1016/j.irfa.2021.101751

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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.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Cash flow, Business enterprises -- Finance, Chief executive officers, Investments, Portfolio management
Journal or Publication Title: International Review of Financial Analysis
Publisher: Elsevier BV
ISSN: 1057-5219
Official Date: May 2021
Dates:
DateEvent
May 2021Published
30 March 2021Available
25 March 2021Accepted
Volume: 75
Article Number: 101751
DOI: 10.1016/j.irfa.2021.101751
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

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