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Investment and Internal Finance: Asymmetric Information or Managerial Discretion?

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  • Degryse, H.
  • de Jong, A.

Abstract

This paper examines the relation between cash-flow availability and investment spending in the Netherlands. In particular, we are interested whether managerial discretion and/or asymmetric information drive the positive relation between cash-flow and investment spending. This relation is positive for both firms with low and high investment opportunities. It is however significantly larger for firms with low investment opportunities suggesting that the managerial-discretion problem is most important in the Dutch setting. Effective corporate-governance may reduce this agency problem. Specific to the Netherlands, firms with low shareholder influence posit a higher cash-flow-investment sensitivity. The relevance of asymmetric information is confirmed as smaller firms and firms from information-sensitive industries show a larger cash-flow-investment sensitivity.

Suggested Citation

  • Degryse, H. & de Jong, A., 2001. "Investment and Internal Finance: Asymmetric Information or Managerial Discretion?," ERIM Report Series Research in Management ERS-2001-86-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    • Handle: RePEc:ems:eureri:147
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    Keywords

    Investment; The Netherlands; asymmetric information; financial constraints; managerial discretion;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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