Timely Loss Recognition, Agency Costs, and the Cash Flow Sensitivity of Firm Investment

Imhof, Michael J.

doi:10.2139/ssrn.1465907

Cited by 4 publications

(22 citation statements)

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“…As a result, the amount of investment made by the company is very dependent (not dependent) on the amount of internal funds, as indicated by higher (lower) investment-cash flow sensitivity (Imhof, 2014). This research also argues that the level of investment-cashflow sensitivity for companies with higher agency cost is greater than companies with lower agency cost.…”

Section: Introductionmentioning

confidence: 73%

“…existence of internal fund is called the sensitivity of investment to internal funds (investment-cash flow sensitivity). This sensitivity shows company's ability to obtain external funding (Kaplan and Zingales, 1997;Hubbard, 1998;Imhof, 2014).…”

Section: Introductionmentioning

confidence: 99%

“…Sensitivity will be greater (smaller) when asymmetry information is high (low) between managers and investors, indicated by higher (smaller) agency cost (Jensen, 1986in Imhof, 2014. Imhof (2014) also state that when the agency cost is relatively high, company will be more difficult to obtain external financing because of the high cost of external capital set by the investors / creditors, thus, the amount of internal funds available will be very influential to predict company's investment activities (high investmentcash flow sensitivity). Conditional conservatism could reduce the level of company's cost of external capital (Guay and Verrecchia, 2007;Suijs, 2008).…”

Section: Introductionmentioning

confidence: 99%

“…This research also argues that the level of investment-cashflow sensitivity for companies with higher agency cost is greater than companies with lower agency cost. Finally, in addition to its ability to reduce the cost of external capital, higher conditional conservatism is also able to improve the quality of corporate governance (Lafond and Watts, 2008;Imhof, 2014). Based on the explanation, it can be said that the effect of conditional conservatism in lowering the investment-cash flow sensitivity is stronger in companies that also have problems in governance (high agency cost firm) and weaker in companies that already have a good governance mechanism (low agency cost firm).…”

Section: Introductionmentioning

confidence: 99%

“…An ''ease'' in obtaining external funding makes the determination of company's investment activities is less dependent to its internal fund, so they could make investment activities more efficient. , 1997;Hubbard, 1998;Imhof, 2014). …”

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The Effect of Conditional Conservatism and Agency Cost on Investment-Cashflow Sensitivity

Wibawa

Wardhani

2017

IRJBS

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This research aims to give empirical evidence of the effect of conditional conservatism on company's investment-cashflow sensitivity, and whether the impact is stronger in high agency cost firms compare to in low agency cost firms. This research uses dividend payout ratio to measure the agency cost, because this study uses Indonesia as a research context where companies in Indonesia majority have concentrated ownership and funding through debt so that agency conflict that appears more dominant is the conflict of agency type two and three. This study uses sample from manufacturing companies listed in Indonesia Stock Exchange during the period 2008-2012. The total observation in this research is 474 firm years, which 152 of the samples is classified as high agency cost firms and 322 sample as low agency cost firms. The result shows that as the recognition of economic losses becomes more timely, the sensitivity of firm investment to cashflow decreases. Conditional conservatism decreases investment-cashflow sensitivity in low agency cost firms but increases the sensitivity in high agency cost firms. In fact, before implementation of conditional conservatism, high agency cost firms have smaller investmentcashflow sensitivity compared to the low agency cost one. Studies | vol. X no. 02 (2017) and Weiss, 1981;Myers and Majluf, 1984). An ''ease'' in obtaining external funding makes the determination of company's investment activities is less dependent to its internal fund, so they could make investment activities more efficient. , 1997;Hubbard, 1998;Imhof, 2014). INTRODUCTIONThe lower the sensitivity shows that corporate investment activities could be funded not only from internal funds, but also from external funds (Fazzari, Hubbard, and Peterson, 1988).There are factors that correlated with the magnitude of sensitivity, one of which is company's agency cost. Sensitivity will be greater

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Section: Introductionmentioning

confidence: 73%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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confidence: 99%

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The Effect of Conditional Conservatism and Agency Cost on Investment-Cashflow Sensitivity

Wibawa

Wardhani

2017

IRJBS

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Does Financial Reporting Conservatism Mitigate Underinvestment?

Hong

Kim

Lobo

2017

Journal of Accounting, Auditing & Finance

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This study examines the role of financial reporting conservatism in mitigating underinvestment problems. Recognizing that volatile cash flows increase the need to access external capital markets and that agency conflicts and information asymmetry make external capital costlier than internal capital, which leads managers to forgo valuable investment projects, Minton and Schrand document a negative relation between cash flow volatility and investment. We draw on Minton and Schrand’s framework to isolate underinvestment problems and hypothesize and document that conservatism mitigates the negative relation between cash flow volatility and investment and that this mitigative effect is more pronounced for firms with ex ante more severe agency conflicts. We also document that conservatism mitigates the sensitivity of investment to cash flow volatility by facilitating access to external capital.

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