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

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Listed author(s):
  • Francis, Bill
  • Hasan, Iftekhar
  • Song, Liang
  • Waisman, Maya

Abstract

Controlling for country-level governance, we investigate how firms' corporate governance influences financing constraints. Using firm-level corporate governance rankings across 14 emerging markets, we find that better corporate governance lowers the dependence of emerging market firms on internally generated cash flows, and reduces financing constraints that would otherwise distort efficient allocation of investment and destroy firm value. Additionally and more importantly, firm-level corporate governance matters more significantly in countries with weaker country-level governance. This suggests substitutability between firm-specific and country-level governance in determining a firm's investment sensitivity to internal cash flows.

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File URL: http://www.sciencedirect.com/science/article/pii/S1566014112000519
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Article provided by Elsevier in its journal Emerging Markets Review.

Volume (Year): 15 (2013)
Issue (Month): C ()
Pages: 57-71

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Handle: RePEc:eee:ememar:v:15:y:2013:i:c:p:57-71
DOI: 10.1016/j.ememar.2012.08.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620356

Keywords: Corporate governance; Emerging markets; Investment–cash flow sensitivity;

Find related papers by JEL classification:

  • G20 - Financial Economics - - Financial Institutions and Services - - - General
  • G30 - Financial Economics - - Corporate Finance and Governance - - - General
  • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
  • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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Cited by:

  1. Gauselmann, Andrea & Noth, Felix, 2015. "Corporate Governance Structures and Financial Constraints in Multinational Enterprises – An Analysis in Selected European Transition Economies on the Basis of the IWH FDI Micro Database 2013 –," IWH Discussion Papers 3/2015, Halle Institute for Economic Research (IWH).
  2. Carsten Sprenger & Olga Lazareva, 2017. "Corporate Governance and Investment: Evidence from Russian Unlisted Firms," HSE Working papers WP BRP 160/EC/2017, National Research University Higher School of Economics.
  3. Milos Markovic & Michael A. Stemmer, 2017. "Firm Growth Dynamics and Financial Constraints: Evidence from Serbian Firms," Documents de travail du Centre d'Economie de la Sorbonne 17012, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. Cynthia A. Utama & Sidharta Utama, 2016. "Interaction between Incentive to Expropriate and Investment Opportunities as a Determinant of Overinvestment Problem in Indonesia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 12(1), pages 73-99.
  5. Athari, Seyed Alireza & Adaoglu, Cahit & Bektas, Eralp, 2016. "Investor protection and dividend policy: The case of Islamic and conventional banks," Emerging Markets Review, Elsevier, vol. 27(C), pages 100-117.
  6. Milos Markovic & Michael Stemmer, 2017. "Firm Growth Dynamics and Financial Constraints: Evidence from Serbian Firms," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01489222, HAL.
  7. Ameer, Rashid, 2014. "Financial constraints and corporate investment in Asian countries," Journal of Asian Economics, Elsevier, vol. 33(C), pages 44-55.
  8. Mulier, Klaas & Schoors, Koen & Merlevede, Bruno, 2016. "Investment-cash flow sensitivity and financial constraints: Evidence from unquoted European SMEs," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 182-197.
  9. Klaas Mulier & Koen Schoors & Bruno Merlevede, 2014. "Investment-Cash Flow Sensitivity and the Cost of External Finance," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/890, Ghent University, Faculty of Economics and Business Administration.

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