The impact of equity ownership groups on investment: Evidence from Ukraine

- The paper empirically analyzes the impact of ownership groups on corporate investment in Ukraine.
- Investment depends on present and past market-to-book values of equity and past investment.
- State, non-domestic and financial companies' ownership has a negative impact on investment.
- Firms owned by the state, insiders and financial and industrial groups face soft budget constraints and over-invest.
- Firms owned by foreigners and financial companies face hard budget constraints and under-invest.

We empirically investigate the impact of different ownership groups on companies' investment in Ukraine with a novel dynamic investment model where investment is based on present and historical levels of profitability (market-to-book value of equity) and lagged investment. Groups include state, insider, non-domestic, financial and financial and industrial group (FIG) ownership. Contrary to the literature, we find that the past level of profitability significantly affects investment; the majority presence of and increases in state ownership have a negative impact on firms' investment, as is the case for non-domestic and financial companies' ownership. Insider and FIG ownership have no impact on investment. We explain the results by the extent of liquidity concerns (hard and soft budget constraints), measured by cash flow interacted with a dummy variable of majority ownership of the respective group, and the extent of asset stripping for the corresponding ownership group and relate them to over- and under-investment, and to the free cash flow or cash constraint hypothesis.