Is Investment-Cash Flow Sensitivity Caused by Agency Costs or Asymmetric Information? Evidence from the UK
Abstract"We investigate the investment-cash flow sensitivity of a large sample of the UK listed firms and confirm that investment is strongly cash flow-sensitive. Is this sensitivity a result of agency problems when managers with high discretion overinvest, or of asymmetric information when managers owning equity are underinvesting if the market (erroneously) demands too high a risk premium? We find that investment-cash flow sensitivity results mainly from the agency costs of free cash flow. The magnitude of the relationship depends on insider ownership in a non-monotonic way. Furthermore, we obtain that outside blockholders, such as financial institutions, the government, and industrial firms (only at high control levels), reduce the cash flow sensitivity of investment via effective monitoring. Finally, financial institutions appear to play a role in mitigating informational asymmetries between firms and capital markets. We corroborate our findings by performing additional tests based on the stochastic efficient frontier approach and power indices." Copyright Blackwell Publishers Ltd, 2005.
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Bibliographic InfoArticle provided by European Financial Management Association in its journal European Financial Management.
Volume (Year): 11 (2005)
Issue (Month): 4 ()
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1354-7798
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- Attig, Najah & Cleary, Sean & El Ghoul, Sadok & Guedhami, Omrane, 2012. "Institutional investment horizon and investment–cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1164-1180.
- Schoubben, Frederiek & Van Hulle, Cynthia, 2009. "The impact of capital market imperfections on the relationship between competition and corporate performance," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/222974, Katholieke Universiteit Leuven.
- Bhattacharya, Prasad S. & Graham, Michael A., 2009. "On institutional ownership and firm performance: A disaggregated view," Journal of Multinational Financial Management, Elsevier, vol. 19(5), pages 370-394, December.
- Schoubben, Frederiek & Van Hulle, Cynthia, 2008. "The impact of growth opportunities on the investment-cash flow sensitivity," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/200999, Katholieke Universiteit Leuven.
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