Corporate governance, accounting information environment and investment-cash flow sensitivity

2018 ◽  
Vol 26 (4) ◽  
pp. 492-507 ◽  
Author(s):  
Ming Li ◽  
Liang Song
Keyword(s):  
Corporate Governance ◽  
Cash Flow ◽  
Accounting Information ◽  
Agency Problems ◽  
Free Cash Flow ◽  
Information Environment ◽  
Content Type ◽  
Financial Decisions ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity

Purpose The purpose of this paper is to test the effects of antitakeover protection on investment-cash flow sensitivity and whether these effects are moderated by firms’ accounting information environment and agency problems. Design/methodology/approach To test the effects of agency problems, the authors use the passage of second-generation antitakeover laws as the testing ground, which is a pseudo-natural experiment that is widely used in the accounting, finance and economics literature (e.g. Armstrong et al., 2012; Bertrand and Mullainathan, 2003). Findings The authors’ analysis shows that investment-cash flow sensitivity is greater when managers are insulated from takeovers. The authors’ results also demonstrate that the effects of the passage of antitakeover laws on investment-cash flow sensitivity are greater when firms’ accounting information environment is poor, which is measured by fewer analysts following and higher analyst forecast dispersion. The authors also show that the effects of the passage of antitakeover laws on investment-cash flow sensitivity are greater when firms have severe agency problems, which are measured by more free cash flow. Originality/value The authors’ research extends the empirical accounting literature about the effects of corporate governance and accounting information environment on firms’ operating and financial decisions.

Unexpected investment, tunnelling and financial constraints

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Le Hong Ngoc Ha ◽  
An Thai
Keyword(s):  
Cash Flow ◽  
Financial Constraints ◽  
Agency Problems ◽  
Free Cash Flow ◽  
Content Type ◽  
Corporate Managers ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
Stock Market Investors ◽  
The Impact

PurposeBased on a sample of 1,435 Vietnamese listed firms over the period from 2005 to 2017, this study examines the sensitivity of unexpected investment to free cash flow and its mechanism.Design/methodology/approachWe tested three hypotheses using two-step system-GMM to investigate investment–cash flow sensitivity for various firm scenarios while accounting for confounding variables.FindingsFirms with negative free cash flow are more likely to engage in underinvestment; conversely, overinvestment is found primarily in firms with positive free cash flow. In terms of the mechanism, while underinvesting decisions are caused mainly by financial constraints, overinvesting behaviour primarily resulted from agency problems, typically in the form of principal-principal conflicts. Interestingly, under the impact of negative cash flow observations, financial constraints tend to decrease investment–cash flow sensitivity. Conversely, the agency costs hypothesis reveals that agency problems are more likely to increase investment–cash flow sensitivity.Originality/valueThese findings not only contribute to the current corporate literature but also provide some important practical implications for stock market investors, corporate managers, and policy-setting bodies, specifically in the Vietnamese market.

Family ownership and free cash flow

2017 ◽  
Vol 13 (2) ◽  
pp. 133-148 ◽  
Author(s):  
Thitima Sitthipongpanich
Keyword(s):  
Firm Performance ◽  
Cash Flow ◽  
Generalized Method Of Moments ◽  
Free Cash Flow ◽  
Family Ownership ◽  
Content Type ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
Lagged Dependent Variable ◽  
Interest Alignment

Purpose The purpose of this paper is to investigate the effect of family ownership on investment-cash flow sensitivity and on firm performance. Design/methodology/approach The author uses panel data to examine the relationship between investment and cash flow and between family ownership and the firm performance of Thai listed firms from 2001 to 2008. To account for the endogeneity of the lagged dependent variable, the investment equation is estimated by the generalized method of moments, following Arellano and Bond (1991). Findings The presence of family owners reduces the sensitivity of investment and cash flow. At low and high levels of family ownership, an increase in family shareholding leads to lower investment-cash flow sensitivity. In contrast, firms with medium family ownership levels have higher investment-cash flow sensitivity. Only at high levels of family ownership is firm performance positively related to family shareholding. Originality/value The ownership levels of family shareholders affect the investment-cash flow sensitivity in an S-shaped relation, supporting the interest alignment and entrenchment effects. When family shareholders have high ownership incentives, their interest alignment reduces the agency costs of free cash flow problems and leads to higher firm performance.

Debt holdings and investment cash flow sensitivity of listed firms

2018 ◽  
Vol 13 (5) ◽  
pp. 943-958 ◽  
Author(s):  
Johnson Worlanyo Ahiadorme ◽  
Agyapomaa Gyeke-Dako ◽  
Joshua Yindenaba Abor
Keyword(s):  
Cash Flow ◽  
Empirical Modeling ◽  
Empirical Literature ◽  
Data Set ◽  
Content Type ◽  
Listed Firms ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
Cash Flow Sensitivities ◽  
Internal Funds

Purpose The purpose of this paper is to examine the effect of debt holdings on the sensitivity of firms’ investment to availability of internal funds. Design/methodology/approach For a panel data set of 27 Ghanaian listed firms for the period 2007–2013, the paper applies the Euler equation approach to the empirical modeling of investment. Findings The study finds support for the assertion that listed firms face less severe corporate control problems and lower financing constraints, and thus, have lower investment cash flow sensitivities. The study also finds that a significant positive sensitivity of investment to internal funds is associated with firms that have high debt holdings. Practical implications An implication of this study is that firms with high debt holdings face greater challenges in accessing external finance. These firms are likely to experience under-investment which at a macro level would translate into lower investments and economic growth for the country. Originality/value Empirical literature document that in the presence of market imperfections, investments of financially constrained firms become sensitive to the availability of internal finance. There are also contradictory evidences regarding the pattern of the observed investment cash flow sensitivity. This study examines the effect of debt holdings on the sensitivity of firms’ investment to availability of cash flow. This is yet to be empirically tested despite some theoretical explanations.

scholarly journals Governança corporativa e sensibilidade investimento-fluxo de caixa no Brasil

2019 ◽  
Vol 17 (2) ◽  
pp. 72
Author(s):  
Breno Augusto de Oliveira Silva ◽  
Daniel Ferreira Caixe ◽  
Elizabeth Krauter
Keyword(s):  
Corporate Governance ◽  
Cash Flow ◽  
A Priori ◽  
Investment Model ◽  
Quality Level ◽  
Financial Constraint ◽  
Publicly Traded Companies ◽  
Flow Sensitivity ◽  
Governance Practices ◽  
Cash Flow Sensitivity

This study aimed to investigate the investment-cash flow sensitivity for Brazilian companies with different degrees of financial constraint according to the quality level of their corporate governance practices. An investment model was estimated through GMM for a panel data of 248 Brazilian publicly traded companies, which were a priori classified in two groups of financial constraint degrees (high and low) according to the Corporate Governance Practices Index (IPGC). The results showed that the quality of corporate governance influences the investment-cash flow sensitivity, and this sensitivity is negative and significant only for firms with poor governance, classified with high financial constraint. Furthermore, it can be concluded that IPGC proved to be an interesting variable for a priori classification of companies and an important determinant of the investment-cash flow sensitivity to identify potentially financially constrained firms.

The impact of macroeconomic condition on investment-cash flow sensitivity of Indian firms

2019 ◽  
Vol 9 (1) ◽  
pp. 19-42
Author(s):  
Gaurav Gupta ◽  
Jitendra Mahakud
Keyword(s):  
Cash Flow ◽  
Economic Condition ◽  
Investment Decisions ◽  
Group Affiliation ◽  
Content Type ◽  
Flow Sensitivity ◽  
Macroeconomic Condition ◽  
Gdp Growth Rate ◽  
Cash Flow Sensitivity ◽  
The Impact

Purpose The purpose of this paper is to investigate the impact of the macroeconomic condition on investment-cash flow sensitivity (ICFS) of Indian firms and examine whether the effect of macroeconomic condition on ICFS depends on the size and group affiliation of the firm. Design/methodology/approach An empirical investigation is conducted using a dynamic panel data model or more specifically system generalized method of moments (GMM) estimation technique. Findings Empirical findings postulate that the availability of cash flow influences the investment decisions which depicts that Indian manufacturing firms are internally as well as externally financially constrained. This study finds that good economic condition (period of high GDP growth rate) reduces the ICFS, although this effect is stronger for small-sized and standalone firms than the large-sized and business group affiliated firms. The authors find that macroeconomic condition has a positive and significant effect on investment decisions. Research limitations/implications This study has considered only the non-financial sector. The future research could explore the effect of macroeconomic condition on ICFS might be affected by firm other characteristics such as firm age and firm capital structure. Social implications The government should provide loan on the low rate to the small-sized firms and standalone firms because it is very difficult for these firms to finance their investment during the bad economic condition (period of low high GDP growth rate). Originality/value This study contributes to the existing literature by analyzing the impact of the macroeconomic condition on ICFS as well as investment decisions of the Indian manufacturing firms, which is an unexplored issue from an emerging market perspective. To the best of my knowledge, this is a first-ever study which explores the effect of macroeconomic condition on investment decisions with respect to business group affiliation and firm size.

CSR, agency costs and investment-cash flow sensitivity: a mediated moderation analysis

2017 ◽  
Vol 43 (3) ◽  
pp. 299-312 ◽  
Author(s):  
Marwa Samet ◽  
Anis Jarboui
Keyword(s):  
Cash Flow ◽  
Agency Costs ◽  
Data Set ◽  
Content Type ◽  
Mediated Moderation ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
Internal Funds ◽  
Investment Spending

Purpose The purpose of this paper is to document the relation between investment-cash flow sensitivity and a firm’s engagement in corporate social responsibility (CSR) activities in European context. Specifically, this paper aims to empirically examine how CSR moderates the sensitivity between investment spending and firm internal funds. Design/methodology/approach The Euler equation technique approach is applied to test the sensitivity of investment to internally generated funds for a panel data set of 398 European companies listed in the STOXX Europe 600 during 2009-2014. Furthermore, a mediated moderation model is developed in order to examine the moderating role of CSR in the investment-cash flow sensitivity, as well as the mediating role of agency costs on the moderation effect of CSR. Findings The results show that CSR performance weakens the sensitivity of investment to internal funds; agency costs of free cash flow mediate the negative moderating effect of CSR on investment-cash flow sensitivity. Thus, this study demonstrates empirically that firms with socially responsible practices are better positioned to obtain financing in the capital markets through reducing market frictions as well as agency costs. Practical implications Firms are invited to engage more in CSR activities that reduce agency conflicts between management and shareholders. Originality/value The originality of this paper consists in proposing the establishment of both direct and indirect link between CSR and investment-cash flow sensitivity.

Financial constraints for investment in Brazil

2014 ◽  
Vol 10 (1) ◽  
pp. 73-92 ◽  
Author(s):  
Vicente Lima Crisóstomo ◽  
Félix Javier López Iturriaga ◽  
Eleuterio Vallelado González
Keyword(s):  
Panel Data ◽  
Euler Equation ◽  
Cash Flow ◽  
Financial Constraints ◽  
Emerging Market ◽  
Growth Opportunities ◽  
Content Type ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
Investment Models

Purpose – The purpose of this paper is to verify the existence of financial constraints for investment in Brazil, an emerging market with growing international visibility. Design/methodology/approach – Using panel data methodology and generalized method of moments (GMM), the paper estimates dynamic investment models based on the Euler equation and Tobin's q for a panel data set of 199 Brazilian non-financial firms for the time period 1995-2006. Findings – Results show that Brazilian firms face financial constraints since their investments depend on internally generated funds. Results are robust to different investment models based on the Euler equation, also controlling for growth opportunities. Significant investment-cash flow sensitivity has been found for the whole sample of firms. Subsamples of firms considered as under financial constraints, according to dividend payout and equity issuance policies, have higher investment-cash flow sensitivity. Investment-cash flow sensitivity of financially constrained firms in Brazil is higher than that in the UK and in Romania, a transition economy. Originality/value – The results extend empirical evidence of financial constraints in Brazil. The paper contributes to the literature by assessing the firms’ financial constraint status on an annual basis, and by using panel data methodology and GMM to estimate dynamic models of investment that take into account the proposals of the hierarchy of finance theory. In addition, the paper controls for growth opportunities. Capital market imperfections affect firm investment in Brazil and such effects are even stronger for financially constrained firms.

scholarly journals BNDES loans and the financial constraints of Brazilian publicly traded companies

2020 ◽  
Vol 55 (4) ◽  
pp. 567-582
Author(s):  
Walter Eclache da Silva ◽  
Eduardo Kayo ◽  
Roy Martelanc
Keyword(s):  
Capital Structure ◽  
Cash Flow ◽  
Financial Constraints ◽  
Theoretical Perspective ◽  
Content Type ◽  
Flow Sensitivity ◽  
Multiplier Effect ◽  
Cash Flow Sensitivity ◽  
Development Banks

Purpose The purpose of this paper is to analyze whether companies that contracted loans from the Brazilian National Bank for Economic and Social Development (BNDES) between 2002 and 2014 were able to invest more than companies that did not. The literature on financial constraints, particularly that based on the investment-cash flow sensitivity model, is among the most studied and controversial in the area of finance, and the discussion on the role of development banks is equally controversial. Design/methodology/approach The main econometric model of this study was based on the investment-cash flow sensitivity model, with the incorporation of a binary variable that captures the role of the BNDES. This model is applied to a sample of companies listed on the B3 from 2002 to 2014. Findings This study shows that loans from the BNDES amplify the effects of cash flow on investments, generating a kind of credit multiplier. An important role of development banks is to reduce the financial constraints typical of developing countries. Research limitations/implications The use of the cash flow sensitivity model in companies that contracted loans from the BNDES is a relevant instrument to test the effect of the BNDES on companies with financial constraints. Practical implications The contracting of BNDES loans by companies can affect both capital structure and cash generation, particularly in companies or years in which there was financial constraint. Social implications Due to the nature of the BNDES as a development bank, there are ramifications in terms of the generation of employment and income inherent to the mission of this type of institution. Knowing the multiplier effect on the cash flow potential of companies has a direct impact on their preservation, enabling them to maintain and expand the supply of jobs. Originality/value This study is the first to integrate two important areas of study. From the theoretical perspective, this study provides evidence on the relationship between the BNDES and company financial constraints that open new avenues of research. From the managerial point of view, the evidence of the multiplier effect is highly important for the management of the capital structure and cash flow of companies.

Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets

2013 ◽  
Vol 15 ◽  
pp. 57-71 ◽  
Author(s):  
Bill Francis ◽  
Iftekhar Hasan ◽  
Liang Song ◽  
Maya Waisman
Keyword(s):  
Corporate Governance ◽  
Emerging Markets ◽  
Cash Flow ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity
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