Ownership structure, corporate value and firm investment: A simultaneous equations analysis of spanish companies

This paper is concerned with the set of mutual relationships between firm valuation and investment, and with the possible endogeneity of ownership structure. In order to deal with them properly, we aim to test the mutual impact of investment, corporate value and ownership by broadening the usual framework with a simultaneous equations approach. Using a sample of 140 Spanish listed companies for the 1991-1997 period, we have found that,consistent with previous research, the alignment and entrenchment hypotheses seem to be confirmed by the estimation of a one-equation model. However, when analyzed by means of a system of simultaneous equations in which a set of mutual relationships is introduced, quite different results were obtained. Although valuation and investment of firms are determined by managerial ownership,we have found that ownership structure may also be influenced both by investment and value. Consequently, it is not completely right to infer that ownership structure determines firm value unidirectionally; however the benchmark should be broadened so as to take an explicit account of the mutual links between firm value, investment and ownership. © 2001 Kluwer Academic Publishers.