Abstract:
We examine the impact of managerial ownership on investment and financial constraints in the
context of China. Using the system generalized method of moments estimation of an investment
Euler equation, we find that investment decisions are related to managerial ownership in two
ways. First, managerial ownership exerts a positive direct effect on corporate investment decisions
by aligning management’s incentives with the interests of shareholders. Second, managerial
ownership helps to reduce the degree of financial constraints faced by firms, suggesting that
managerial ownership acts as a form of credible guarantee to lenders, signaling the quality of
investment projects to the capital markets. Our findings suggest that recent policies enacted by
the Chinese government, aimed at reforming ownership structure and encouraging managerial
ownership in listed firms, help reduce agency costs and asymmetric information; thereby facilitating
firms’ investment efficiency. Our findings will be of interest to scholars, practitioners, and
policy makers interested in the financial impacts of management-compensation contracts.
