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Interaction between Incentive to Expropriate and Investment Opportunities as a Determinant of Overinvestment Problem in Indonesia

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  • Cynthia A. Utama

    (Management Department, Faculty of Economics and Business, Universitas Indonesia, Depok 16424, Indonesia)

  • Sidharta Utama

    (Accounting Department, Faculty of Economics and Business, Universitas Indonesia, Depok 16424, Indonesia)

Abstract

The study investigates if the level of investment opportunities reduces the positive impact of expropriation incentive on the level of overinvestments. Under the condition of capital constraint, high incentive of controlling shareholders to expropriate firms’ wealth do not necessarily result in overinvesments if firms have abundant investment opportunities. The study also examine if positive investment-cash flow sensitivity still exists after a significant corporate governance reforms in Indonesia. The study finds no positive relation between investments and cash flow. It documents that overinvestments primarily occur in firms whose controlling shareholders have small ownership. Further, it documents that higher investment opportunities mitigate the effect of expropriaton incentive on overinvestments.

Suggested Citation

  • 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.
    • Handle: RePEc:usm:journl:aamjaf01201_73-99
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