Controlling shareholders and investment-risk sensitivity in an emerging economy

Resumen:
In this paper, we investigate the role of agency conflicts between controlling and minority shareholders on the investment-risk relationship. Using panel data from 412 Brazilian firms between 1997 and 2010, we show that investment is less sensitive to idiosyncratic risk for companies in which the largest shareholder presents higher levels of ownership-control divergence. Dual-class shares are the main driver of the lower investment sensitivity to idiosyncratic risk. Board independence does not affect controlling shareholders' behavior toward risky investments. Our findings are consistent with entrenchment effects in the sense that dominant shareholders may select riskier projects when pursuing self-interest goals.