Abstract:
Imperfect capital markets are considered to have agency conflicts arising from asymmetric
information between insiders and outsiders, affecting corporate investment decisions. This study
investigates the role of managerial shareholding and financial constraints in investment choices of
a firm. This research is conducted using panel data consisting of 60 non-financial firms listed on
Pakistan Stock Exchange during 2011-2020. The two-step system GMM technique is applied in
this study and the findings depict that managerial shareholding and financial constraints play a
significant role in corporate investment decisions. Firms in Pakistan experience a positive
incentive alignment effect of providing managerial ownership, which aids in overcoming agency
problems and enhances the quality of investment projects undertaken by firms. Heavy dependence
on internally generated funds for investments suggests the high “investment to cash flow
sensitivity”, which signifies financial constraints. Results are in line with the hypothesis of agency
theory, pecking order theory and Tobin’s Q theory. This study also explores the factors affecting
investment decisions of manufacturing and energy-power sectors firms. The findings reveal that
firms in the energy and power sectors are not financially constrained in terms of their investments,
while the manufacturing sector firms exhibit a significant reliance on cash-flows which suggests
higher investment cash-flows sensitivities. Furthermore, managerial shareholding exerts a
negative effect on investment decisions of firms in energy and power sectors; however, no
significant impact was found in the case of manufacturing firms. This study will be resourceful for
shareholders, financial investors and policymakers who want to analyze factors affecting corporate
investments.
