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This article documents a nonlinear relationship between insider shareholdings and the sensitivity of a firm's investment to its cash flow. As insider holdings increase from zero, investment-cash flow sensitivities rise sharply. This relationship weakens at higher levels of insider ownership, and I find some evidence that investment-cash flow sensitivities decrease slowly with insider holdings after a certain point. I argue that these results are inconsistent with the hypothesis that free-cash-flow problems cause the widely noted sensitivity of investment to cash flow. The results are consistent with the presence of asymmetric-information problems in the capital markets that are heightened when managers have a strong incentive to maximize shareholder returns.
Charles J. Hadlock (Thu,) studied this question.