Ownership structure and financial constraints: Evidence from a structural estimation

This article examines the impact of the divergence between corporate insiders' control rights and cash-flow rights on firms' external finance constraints via generalized method of moments estimation of an investment Euler equation. Using a large sample of U.S. firms during the 1994–2002 period, we find that the shadow value of external funds is significantly higher for companies with a wider insider control-ownership divergence, suggesting that companies whose corporate insiders have larger excess control rights are more financially constrained. The effect of insider excess control rights on external finance constraints is more pronounced for firms with higher degrees of informational opacity and for firms with financial misreporting, and is moderated by institutional ownership. The results show that the agency problems associated with the control-ownership divergence can have a real impact on corporate financial and investment outcomes.

► We study the impact of insider control-ownership divergence on external finance constraints.
► We find real effects of the agency problems associated with divergent control and cash-flow rights.
► Firms whose insiders have larger excess control rights are more financially constrained.
► Information opacity increases the effect of insider excess control rights on finance constraints.
► Institutional ownership moderates the effect of excess control rights.