Journal of Management & Governance

, Volume 22, Issue 1, pp 31–54 | Cite as

Ownership structure and investment-cash flow sensitivity

  • Imen Derouiche
  • Majdi Hassan
  • Sarra Amdouni


This study investigates the effect of ownership structure on the use of cash flow in financing corporate investments—the investment-cash flow sensitivity—in a concentrated ownership context. Using a sample of 6797 French listed firms from 2000 to 2013, results show that investment-cash flow sensitivity decreases with the cash-flow rights of the controlling shareholder and increases with the separation of its cash-flow and control rights (excess control rights). Firms are, thus, less likely to use cash flow in investments when the interests of controlling shareholders are aligned with those of minority shareholders. However, they appear to use considerable internal funds for their investments when they have severe agency problems, driven by excess control rights of the controlling shareholders. Overall, our findings help advance the understanding of the role of agency relationship in shaping corporate financial policy.


Ownership structure Excess control rights Investment-cash flow sensitivity 

JEL Classification

G32 G34 M41 


  1. Ağca, S., & Mozumdar, A. (2008). The impact of capital market imperfections on investment-cash flow sensitivity. Journal of Banking and Finance, 32, 207–216.CrossRefGoogle Scholar
  2. Ali, A., Chen, T., & Radhakrishnan, S. (2007). Corporate disclosures by family firms. Journal of Accounting and Economics, 44, 238–286.CrossRefGoogle Scholar
  3. Almeida, H. V., & Wolfenzon, D. (2006). A theory of pyramidal ownership and family business groups. The Journal of Finance, 61, 2637–2680.CrossRefGoogle Scholar
  4. Andrén, N., & Jankensgard, H. (2015). Wall of cash: The investment-cash flow sensitivity when capital becomes abundant. Journal of Banking and Finance, 50, 204–213.CrossRefGoogle Scholar
  5. Ascioglu, A., Shantaram, P. H., & McDermott, J. B. (2008). Information asymmetry and investment–cash flow sensitivity. Journal of Banking and Finance, 32, 1036–1048.CrossRefGoogle Scholar
  6. Attig, N., Fong, W., Gadhoum, Y., & Lang, L. (2006). Effects of large shareholding on information asymmetry and stock liquidity. Journal of Banking and Finance, 30, 2875–2892.CrossRefGoogle Scholar
  7. Belkhir, M., Boubaker, S., & Derouiche, I. (2014). Control-ownership wedge. Board of Directors and Value of Excess Cash, Economic Modeling, 39, 110–122.Google Scholar
  8. Ben-Nasr, H., Boubaker, S., & Rouatbi, W. (2015). Ownership structure, control contestability and corporate debt maturity. Journal of Corporate Finance, 35, 265–285.CrossRefGoogle Scholar
  9. Bennedsen, M., & Nielsen, K. (2010). Incentive and entrenchment effects in European ownership. Journal of Banking and Finance, 34, 2212–2229.CrossRefGoogle Scholar
  10. Bertrand, M., Mehta, P., & Mullainathan, S. (2002). Ferreting out tunneling: An application to Indian business groups. The Quarterly Journal of Economics, 117, 121–148.CrossRefGoogle Scholar
  11. Bertrand, M., & Schoar, A. (2006). The role of family in family firms. The Journal of Economic Perspectives, 20, 73–96.CrossRefGoogle Scholar
  12. Boubaker, S. (2007). Ownership-control discrepancy and firm value: Evidence from France. Multinational Finance Journal, 11, 211–252.CrossRefGoogle Scholar
  13. Boubaker, S., Derouiche, I., & Lasfer, M. (2014). Geographic location, excess control rights, and cash holdings. International Review of Financial Analysis, 42, 24–37.CrossRefGoogle Scholar
  14. Boubaker, S., & Labégorre, F. (2006). Environnement Informationnel et Structure de Propriété et de Contrôle des Sociétés Cotées Françaises. Finance, Contrôle et Stratégie, 9, 5–38.Google Scholar
  15. Broussard, J., Buchenroth, S., & Pilotte, E. (2004). CEO incentives, cash flow, and investment. Financial Management, 33, 51–70.Google Scholar
  16. Claessens, S., Djankov, S., Fan, J. P. H., & Lang, L. H. P. (2002). Disentangling the incentive and entrenchment effects of large shareholdings. Journal of Finance, 57, 2741–2771.CrossRefGoogle Scholar
  17. Claessens, S., Djankov, S., & Lang, L. H. P. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58, 81–112.CrossRefGoogle Scholar
  18. Cleary, S., Povel, P., & Raith, M. (2007). The U-shaped investment curve: Theory and evidence. Journal of Financial and Quantitative Analysis, 42, 1–40.CrossRefGoogle Scholar
  19. Cronqvist, H., & Nilsson, M. (2003). Agency costs of controlling shareholders. Journal of Financial and Quantitative Analsysis, 38, 695–719.CrossRefGoogle Scholar
  20. Degryse, H., & De Jong, A. (2006). Investment and internal finance: Asymmetric information or managerial discretion? International Journal of Industrial Organization, 24, 125–147.CrossRefGoogle Scholar
  21. Faccio, M., & Lang, L. H. P. (2002). The ultimate ownership of Western European corporations. Journal of Financial Economics, 65, 365–395.CrossRefGoogle Scholar
  22. Fan, J., & Wong, T. (2002). Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics, 33, 401–425.CrossRefGoogle Scholar
  23. Fazzari, S. M., Hubbard, G. R., & Petersen, B. C. (1988). Financing constraints and corporate investment. Brookings Papers on Economic Activity, 1, 141–195.CrossRefGoogle Scholar
  24. Francis, J., Schipper, K., & Vincent, L. (2005). Earnings and dividend informativeness when cash flow rights are separated from voting rights. Journal of Accounting and Economics, 39, 329–360.CrossRefGoogle Scholar
  25. George, R., Kabir, R., & Qian, J. (2011). Investment–cash flow sensitivity and financing constraints: New evidence from Indian business group firm. Journal of Multinational Financial Management, 21, 69–88.CrossRefGoogle Scholar
  26. Goergen, M., & Renneboog, L. (2001). Investment policy, internal financing and ownership concentration in the UK. Journal of Corporate Finance, 7, 257–284.CrossRefGoogle Scholar
  27. Greenwald, B., Stiglitz, J., & Weiss, A. (1984). Informational imperfections in the capital market and macroeconomic fluctuations. American Economic Review, 74, 194–199.Google Scholar
  28. Grossman, S., & Hart, O. (1988). One share-one vote and the market for corporate control. Journal of Financial Economics, 20, 175–202.CrossRefGoogle Scholar
  29. Guedhami, O., & Mishra, D. (2009). Excess control, corporate governance and implied cost of equity: International evidence. Financial Review, 44, 489–524.CrossRefGoogle Scholar
  30. Hadlock, C. (1998). Ownership, liquidity and investment. Rand Journal of Economics, 29, 487–508.CrossRefGoogle Scholar
  31. Harris, M., & Raviv, A. (1988). Corporate governance: Voting rights and majority rules. Journal of Financial Economics, 20, 203–235.CrossRefGoogle Scholar
  32. Holmen, M., & Högfeldt, P. (2009). Pyramidal discounts: Tunneling or overinvestment? International Review of Finance, 9, 133–175.CrossRefGoogle Scholar
  33. Islam, S. S., & Mozumdar, A. (2007). Financial market development and the importance of internal cash: Evidence from international data. Journal of Banking and Finance, 31, 641–658.CrossRefGoogle Scholar
  34. Jensen, M. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76, 323–329.Google Scholar
  35. Jensen, M., & Meckling, W. (1976). The theory of firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–350.CrossRefGoogle Scholar
  36. Jiang, L., Kim, J. B., & Pang, L. (2011). Control-ownership wedge and investment sensitivity to stock price. Journal of Banking and Finance, 35, 2856–2860.CrossRefGoogle Scholar
  37. La Porta, R., Lopez- de Silanes, F., Shleifer, A., & Vishny, R. W. (2000). Agency problems and dividend policies around the world. The Journal of Finance, 55, 1–33.CrossRefGoogle Scholar
  38. La Porta, R., Lopez–de-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance, 54, 471–517.CrossRefGoogle Scholar
  39. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of Political Economy, 106, 1113–1155.CrossRefGoogle Scholar
  40. Lan, Y., Wang, N., (2006). Investor protection and investment, Working paper, Columbia University.Google Scholar
  41. Lin, C., Ma, Y., Malatesta, P., & Xuan, Y. (2011). Ownership structure and the cost of corporate borrowing. Journal of Financial Economics, 100, 1–23.CrossRefGoogle Scholar
  42. Lin, C., Ma, Y., Malatesta, P., & Xuan, Y. (2013). Corporate ownership structure and the choice between bank debt and public debt. Journal of Financial Economics, 109, 517–534.CrossRefGoogle Scholar
  43. Love, I. (2003). Financial development and financing constraints: International evidence from the structural investment model. Review of Financial Studies, 16, 765–791.CrossRefGoogle Scholar
  44. Maury, B. (2006). Family ownership and firm performance: Empirical evidence from Western European corporations. Journal of Corporate Finance, 12, 321–341.CrossRefGoogle Scholar
  45. Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48, 261–297.Google Scholar
  46. Morck, R., Shleifer, A., & Vishny, R. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293–315.CrossRefGoogle Scholar
  47. Mueller, D. C., & Peev, E. (2007). Corporate governance and investment in Central and Eastern Europe. Journal of Comparative Economics, 35, 414–437.CrossRefGoogle Scholar
  48. Myers, S. C. (1984). The capital structure puzzle. Journal of Finance, 39, 575–592.CrossRefGoogle Scholar
  49. Myers, S., & Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13, 187–221.CrossRefGoogle Scholar
  50. Officer, M. S. (2011). Overinvestment, corporate governance, and dividend initiations. Journal of Corporate Finance, 15, 793–812.Google Scholar
  51. Pawlina, G., & Renneboog, L. (2005). Is investment-cash flow sensitivity caused by agency costs or asymmetric information? European Financial Management, 11, 483–513.CrossRefGoogle Scholar
  52. Pindado, J., Requejo, I., & De la Torre, C. (2011). Family control and investment–cash flow sensitivity: Empirical evidence from the Euro zone. Journal of Corporate Finance, 17, 1389–1409.CrossRefGoogle Scholar
  53. Richardson, S. (2006). Over-investment of free cash flow. Review of Accounting Studies, 11, 159–189.CrossRefGoogle Scholar
  54. Shleifer, A., & Vishny, R. W. (1986). Large shareholders and corporate control. Journal of Political Economy, 94(3), 461–488.CrossRefGoogle Scholar
  55. Stulz, R. (1990). Managerial discretion and capital structure. Journal of Financial Economics, 26, 3–27.CrossRefGoogle Scholar
  56. Wei, K. J., & Zhang, Y. (2008). Ownership structure, cash flow, and capital investment: Evidence from East Asian economies before the financial crisis. Journal of Corporate Finance, 14, 118–132.CrossRefGoogle Scholar
  57. Zhang, G. (1998). Ownership concentration, risk aversion and the effect of financial structure on investment decisions. European Economic Review, 42, 1751–1778.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Unité de recherche CREAUniversity of LuxembourgLuxembourgLuxembourg
  2. 2.DEFIESSEC TunisTunisTunisia

Personalised recommendations