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Controlling shareholders and investment-risk sensitivity in an emerging economy

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  • Caixe, Daniel Ferreira
  • Kalatzis, Aquiles Elie Guimarães
  • Castro, Luiz Ricardo Kabbach de

Abstract

In this paper, we investigate the role of agency conflicts between controlling and minority shareholders on the investment-risk relationship. Using panel data from 412 Brazilian firms between 1997 and 2010, we show that investment is less sensitive to idiosyncratic risk for companies in which the largest shareholder presents higher levels of ownership-control divergence. Dual-class shares are the main driver of the lower investment sensitivity to idiosyncratic risk. Board independence does not affect controlling shareholders' behavior toward risky investments. Our findings are consistent with entrenchment effects in the sense that dominant shareholders may select riskier projects when pursuing self-interest goals.

Suggested Citation

  • Caixe, Daniel Ferreira & Kalatzis, Aquiles Elie Guimarães & Castro, Luiz Ricardo Kabbach de, 2019. "Controlling shareholders and investment-risk sensitivity in an emerging economy," Emerging Markets Review, Elsevier, vol. 39(C), pages 133-153.
    • Handle: RePEc:eee:ememar:v:39:y:2019:i:c:p:133-153
    DOI: 10.1016/j.ememar.2019.04.002
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    Keywords

    Investment decisions; Idiosyncratic risk; Ownership-control divergence; Agency problems; Emerging economy;
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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