Corporate governance and the sensitivity of investments to cash flows

Abstract

We find very strong and consistent evidence that investments in StrongGovernance firms (managers not entrenched) are strongly sensitive to availability of internal cash flows while such sensitivity is not different from zero for Weak-Governance firms (entrenched management). We interpret this as evidence in support of Kaplan and Zingales' (1997) contention that sensitivity of investments to cash flows is not an adequate measure of financing constraints. More importantly, our findings are consistent with Kaplan and Zingales' conjecture that the observed sensitivity of investments to cash flows in firms that do not face financing constraints may be driven by excessive risk aversion of managers.

Going green, going clean: Lean‐green sustainability strategy and firm growth

“…This paper measures Growth as the natural logarithm of five-year annual growth of sales. We utilised the Tobin's Q (Tobin &Brainard, 1968;Tobin, 1969;Tobin, 1978) as a robust measure of firm growth and value-creation opportunities (Aivazian et al, 2005;Fauver & Naranjo, 2010;Lin &Lee, 2011;Bhabra et al, 2018).We compute the Tobin's Q as the market value of assets divided by the book value of assets as a robustness measure for firm growth prospects. If Tobin's Q does represent firm growth and value creation opportunities, there should be a positive relationship between the Tobin's Q ratio and future operating performance for a firm (Shin &Park, 1999;Walker, 2000).…”

Tax Avoidance, Managerial Ability, and Investment Efficiency

“…Bhabra et al . () find that firms with strong corporate governance are sensitive to available internal cash flows and are more likely to forgo positive NPV projects in order to build a cash cushion to shield against potential future economic downturns.…”

“…As a result, there should be little or no association between a firm's internally generated cash flows and its investments (Biddle and Hilary, ; Biddle et al ., ). However, in the presence of agency problems or weak corporate governance regimes that limit access to external financing, investment spending is likely to be sensitive to cash flows (e.g., Bhabra et al ., ), including the cash flows generated by tax avoidance. In this paper, we examine whether the notion of firm managerial ability, as developed by Demerjian et al .…”

The combined impacts of fiscal and credit policies on green firm's investment opportunity: Evidences from Chinese firm‐level analysis

“…Credit constraints and overall credit growth have a strong impact on firms' investment decisions and outward direct investments (Gandelman & Rasteletti, 2017; Gómez, 2019; Orive, 2016; Regis, 2018; Wang et al, 2016). For those firms without financing constraints, the sensitivity of investments to cash flows may be driven by excessive risk aversion on the part of firm managers (Bhabra et al, 2018). Credit distortion adversely affects corporate investment efficiency (Wang et al, 2018).…”