The effect of ownership structure on investment decisions under exogenous shocks

Abstract

Research Question/Issue: We assess how ownership concentration influences the sensitivities of expansion investments and maintenance investments to changes in a firm's cash flow. We find the causal effect by exploiting the exogenous variation in the price of a firm's product. We also evaluate whether state versus private ownership affects the impact of ownership concentration on investment–cash flow sensitivities. Research Findings/Insights: Using detailed data from 134 major copper mines operating in 29 countries over a 17-year period, we show that a more concentrated ownership increases the sensitivity of expansion investments to changes in a firm's cash flow, while we do not detect a significant effect for maintenance investments. We also find that state ownership negatively moderates the effects of ownership concentration on the expansion investment–cash flow sensitivity. Theoretical/Academic Implications: The findings improve our understanding of ownership structures and show the nuances of these structures when different ownership features are combined in the assessment of investment sensitivities. Practitioner/Policy Implications: The asymmetric effects of ownership structures on different investment sensitivities call for a more fine-grained analysis of incentives, benchmarking, and information disclosure policies. This issue is especially relevant in state-owned enterprises (SOEs) and in firms with a low ownership concentration.