Home > Research > Publications & Outputs > Is investment-cash flow sensitivity caused by a...

Electronic data

  • Efm2005

    Rights statement: The definitive version is available at www.blackwell-synergy.com

    Submitted manuscript, 526 KB, PDF document


Text available via DOI:

View graph of relations

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

Research output: Contribution to journalJournal articlepeer-review

<mark>Journal publication date</mark>09/2005
<mark>Journal</mark>European Financial Management
Issue number4
Number of pages31
Pages (from-to)483-513
Publication StatusPublished
<mark>Original language</mark>English


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.

Bibliographic note

The definitive version is available at www.blackwell-synergy.com