Inter-Dependencies Between Insider Ownership,Capital Structure,Investment Decisions and Corporate Valuation 1

Abstract

This study empirically tests the interrelationships among ownership structure, capital structure, investment decisions and corporate valuation. The Hausman specification tests show that these variables are endogenously related and therefore the study uses a system of equations and estimates the relations using the 2SLS method. The empirical tests show that the relationship between corporate investment and corporate value is positive, but nonlinear at varying levels of inside ownership. Results also show that the impact of insider ownership on corporate investment and value is nonlinear, a unique finding of this study. Furthermore, this study confirms substitute relationships among ownership measures (debt, insider ownership, and institutional ownership) as well as between investment flexibility and financial flexibility.