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

Sewon Kwon, Jae Hwan Ahn, Gi H. Kim

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

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.

Original languageEnglish
Article number101751
JournalInternational Review of Financial Analysis
Volume75
DOIs
StatePublished - May 2021

Bibliographical note

Publisher Copyright:
© 2021 Elsevier Inc.

Keywords

  • CEO overconfidence
  • Free cash flow
  • Investment distortion
  • Investment-cash flow sensitivity
  • Shareholder intervention

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