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    Rights statement: This is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis 75, 2021 DOI: 10.1016/j.irfa.2021.101751

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

Research output: Contribution to Journal/Magazine › Journal article › peer-review

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Article number101751
<mark>Journal publication date</mark>31/05/2021
<mark>Journal</mark>International Review of Financial Analysis
Volume75
Number of pages19
Publication StatusPublished
Early online date30/03/21
<mark>Original language</mark>English

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.

Bibliographic note

This is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis 75, 2021 DOI: 10.1016/j.irfa.2021.101751