Lancaster EPrints

Is investment-cash flow sensitivity caused by agency costs or asymmetric information? Evidence from the UK

Pawlina, G and Renneboog, Luc D R (2005) Is investment-cash flow sensitivity caused by agency costs or asymmetric information? Evidence from the UK. European Financial Management, 11 (4). pp. 483-513. ISSN 1354-7798

[img]
Preview
PDF - Draft Version
Download (525Kb) | Preview

    Abstract

    We investigate the investment-cash flow sensitivity of a large sample of the UK listed firms and confirm that investment is strongly cash flow-sensitive. Is this sensitivity a result of agency problems when managers with high discretion overinvest, or of asymmetric information when managers owning equity are underinvesting if the market (erroneously) demands too high a risk premium? We find that investment-cash flow sensitivity results mainly from the agency costs of free cash flow. The magnitude of the relationship depends on insider ownership in a non-monotonic way. Furthermore, we obtain that outside blockholders, such as financial institutions, the government, and industrial firms (only at high control levels), reduce the cash flow sensitivity of investment via effective monitoring. Finally, financial institutions appear to play a role in mitigating informational asymmetries between firms and capital markets. We corroborate our findings by performing additional tests based on the stochastic efficient frontier approach and power indices.

    Item Type: Journal Article
    Journal or Publication Title: European Financial Management
    Additional Information: The definitive version is available at www.blackwell-synergy.com
    Subjects:
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 44426
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 19:15
    Refereed?: Yes
    Published?: Published
    Last Modified: 21 Oct 2017 00:02
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/44426

    Actions (login required)

    View Item