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Idiosyncratic risk, the private benefits of control and investment timing

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  • Wen, Chunhui
  • Xia, Xin
  • Yang, Jinqiang

Abstract

This paper develops an incomplete-markets model of investment timing by a firm’s controlling shareholder, who is exposed to idiosyncratic risk and pursues private benefits at the expense of outside shareholders. We show that the timing of investment selected by the controlling shareholder reflects a tradeoff between his incentives to pursue private benefits and the costs of nondiversification. The firm may overinvest or underinvest depending on the magnitude of the agency conflicts. Moreover, our theoretical model predicts that increasing the cash flow ownership of the controlling shareholder will decease the total social welfare, which provides novel testable empirical implications for investment.

Suggested Citation

  • Wen, Chunhui & Xia, Xin & Yang, Jinqiang, 2017. "Idiosyncratic risk, the private benefits of control and investment timing," Economics Letters, Elsevier, vol. 153(C), pages 65-71.
  • Handle: RePEc:eee:ecolet:v:153:y:2017:i:c:p:65-71
    DOI: 10.1016/j.econlet.2017.02.011
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    References listed on IDEAS

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    Cited by:

    1. Fan Hu & Yaoyao Wu, 2023. "R&D investment under incomplete markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 858-861, March.
    2. He, Mingfeng & Huang, Dengshi & Zhou, Jianan, 2023. "The impacts of share pledging on firm investment timing and valuation," International Review of Financial Analysis, Elsevier, vol. 87(C).

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    More about this item

    Keywords

    Incomplete-markets; Investment timing; Investor protection; Agency conflicts;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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