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

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Is investment-cash flow sensitivity caused by agency costs or asymmetric information? Evidence from the UK. / Pawlina, G; Renneboog, Luc D R.
In: European Financial Management, Vol. 11, No. 4, 09.2005, p. 483-513.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Harvard

Pawlina, G & Renneboog, LDR 2005, 'Is investment-cash flow sensitivity caused by agency costs or asymmetric information? Evidence from the UK', European Financial Management, vol. 11, no. 4, pp. 483-513. https://doi.org/10.1111/j.1354-7798.2005.00294.x

APA

Pawlina, G., & Renneboog, L. D. R. (2005). Is investment-cash flow sensitivity caused by agency costs or asymmetric information? Evidence from the UK. European Financial Management, 11(4), 483-513. https://doi.org/10.1111/j.1354-7798.2005.00294.x

Vancouver

Pawlina G, Renneboog LDR. Is investment-cash flow sensitivity caused by agency costs or asymmetric information? Evidence from the UK. European Financial Management. 2005 Sept;11(4):483-513. doi: 10.1111/j.1354-7798.2005.00294.x

Author

Pawlina, G ; Renneboog, Luc D R. / Is investment-cash flow sensitivity caused by agency costs or asymmetric information? Evidence from the UK. In: European Financial Management. 2005 ; Vol. 11, No. 4. pp. 483-513.

Bibtex

@article{fbd9b6d3079e44d8845ec86538b52607,
title = "Is investment-cash flow sensitivity caused by agency costs or asymmetric information? Evidence from the UK",
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.",
author = "G Pawlina and Renneboog, {Luc D R}",
note = "The definitive version is available at www.blackwell-synergy.com",
year = "2005",
month = sep,
doi = "10.1111/j.1354-7798.2005.00294.x",
language = "English",
volume = "11",
pages = "483--513",
journal = "European Financial Management",
issn = "1354-7798",
publisher = "Wiley-Blackwell",
number = "4",

}

RIS

TY - JOUR

T1 - Is investment-cash flow sensitivity caused by agency costs or asymmetric information? Evidence from the UK

AU - Pawlina, G

AU - Renneboog, Luc D R

N1 - The definitive version is available at www.blackwell-synergy.com

PY - 2005/9

Y1 - 2005/9

N2 - 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.

AB - 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.

U2 - 10.1111/j.1354-7798.2005.00294.x

DO - 10.1111/j.1354-7798.2005.00294.x

M3 - Journal article

VL - 11

SP - 483

EP - 513

JO - European Financial Management

JF - European Financial Management

SN - 1354-7798

IS - 4

ER -