The Impact of Managerial Shareholding and Financial Constraints on Investment Decisions Vol. 12, Issue 1.

Abstract

Agency conflicts arising from asymmetric information between insiders and outsiders affect company investment decisions in imperfect capital markets. This study examines the influence of managerial shareholding and financial constraints on investment choices. Utilizing panel data from 60 nonfinancial firms listed on the Pakistan Stock Exchange from 2011 to 2020, we employ the system GMM technique. Our findings indicate that both managerial shareholding and financial constraints significantly impact corporate investment decisions. Increased managerial ownership aligns incentives favorably, helping to mitigate agency problems and enhance the quality of investment projects. The reliance on internally generated funds for investments points to a high investment-to-cash-flow sensitivity, which reflects financial constraints. This study further investigates the factors influencing investment decisions in the manufacturing and energy/power sectors. Our results show that firms in the energy/power sectors are not financially constrained in their investments, while manufacturing firms exhibit a strong dependence on cash flows, indicating higher investment cash flow sensitivities.