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INVESTMENT, CASH FLOW AND MANAGERIAL DISCRETION IN STATE-OWNED FIRMS-Evidence across soft and hard budget constraints

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In this paper we extend to state-owned enterprises the empirical work on investment-cash flow sensitivities. Our sample is a panel of Italian state-owned manufacturing firms over the period 1977-1993. The distinctive element of public firms’ financial environment is the budget regime under which they operate. Our analysis of Italian institutions identifies a switch from a soft to a hard budget constraint regime in 1987, for which a critical determinant was Italy’s attempt to qualify for EMU. We estimate a number of models of investment with additional cash flow terms and test for parameter constancy across budget regimes and the business cycle. We find that there is a positive correlation between investment and cash flow also for public firms, but only when the budget regime is soft. We argue that excessive managerial discretion is likely to be responsible for this correlation. We also find that the switch to a hard regime brings about an important change in the investment decisions of this panel of public enterprises.

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File URL: http://www.ceris.cnr.it/ceris/workingpaper/2000/wp10_00_BertRon.pdf
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Paper provided by Institute for Economic Research on Firms and Growth - Moncalieri (TO) in its series CERIS Working Paper with number 200010.

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Length: 45 pages Keywords : Capital markets imperfections, public enterprises, investment and cash flow, soft-budget constraint, business cycle, managerial discretion, Italian firms.
Date of creation: Dec 2000
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Handle: RePEc:csc:cerisp:200010

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  1. Tirole, Jean, 1994. "The Internal Organization of Government," Oxford Economic Papers, Oxford University Press, vol. 46(1), pages 1-29, January.
  2. Hall, B. & Mairesse, J. & Mulkay, B., 1998. "Firm-Level Investment in France and the United States: An Exploration of What We Have Learned in Twenty Years," Economics Papers 143, Economics Group, Nuffield College, University of Oxford.
  3. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
  4. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  5. Steve Bond & Julie Elston & Jacques Mairesse & Benoit Mulkay, 1997. "Financial factors and investment in Belgium, France, German and the UK: A comparison using company panel data," IFS Working Papers W97/08, Institute for Fiscal Studies.
  6. Bertero, Elisabetta & Rondi, Laura, 2000. "Financial pressure and the behaviour of public enterprises under soft and hard budget constraints: evidence from Italian panel data," Journal of Public Economics, Elsevier, vol. 75(1), pages 73-98, January.
  7. Alessandro Sembenelli & Diego Margon & Davide Vannoni, 1995. "Panel Ceris Su Dati Di Impresa: Aspetti Metodologici E Istruzioni Per L’Uso," CERIS Working Paper 199507, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
  8. Rondi, Laura & Sembenelli, Alessandro & Zanetti, Giovanni, 1994. "Is excess sensitivity of investment to financial factors constant across firms? Evidence from panel data on Italian companies," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 365-383, July.
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Cited by:
  1. Harrison, Ann E. & McMillan, Margaret S., 2003. "Does direct foreign investment affect domestic credit constraints?," Journal of International Economics, Elsevier, vol. 61(1), pages 73-100, October.

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