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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
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 | ||||||||
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| Subjects: | H Social Sciences > HG Finance | ||||||||
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| 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: |
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| 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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