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Overinvestment When Control Separates from Ownership : Evidence from Publicly Listed Companies in China *

In this paper, we study how separation of control from ownership affects overinvestment by presenting a simple model extended from La Porta et al. (2002). We find that firms with controlling shareholders whose control is more separated from ownership are likely to overinvest more, even if controlling shareholders expropriate funds for purpose of other than investment. Using over 1000 public listed companies in China from 2004-2007, we confirm this result, which points to possible inefficiency in the high investment in China’s recent history.