Investment and Firm Value: An Analysis Using Panel Data

2009

Accounting & Finance

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This paper investigates how ownership affects the investment-cash flow sensitivity by taking into account the non-linearities of ownership with respect to firm value, and using a free cash flow index and a criterion for financial constraints to disentangle underinvestment and overinvestment. Interesting results are provided by estimating using the Generalized Method of Moments to eliminate the endogeneity problem. The alignment of interests between owners and managers and the monitoring by concentrated ownership both alleviate the sensitivity of investment to cash flow both in underinvestor and overinvestor firms. However, in the presence of controlling owners, underinvestment and overinvestment are exacerbated. Copyright (c) The Authors. Journal compilation (c) 2009 AFAANZ.

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Section: Empirical Models and Hypothesesmentioning

confidence: 98%

Effect of ownership structure on underinvestment and overinvestment: empirical evidence from Spain

2009

Accounting & Finance

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“…According to Jensen's (1986) theory, firms with a high level of free cash flow (HFCF firms) tend to use these funds in negative NPV projects. Several studies about investment find support for Jensen's (1986) theory (Del Brio, Perote, and Pindado, 2003a; Del Brio, Miguel, and Pindado, 2003b) in that firms with a low (high) free cash flow level are expected to experience positive (negative) market reaction to investment announcements. However, there are other studies (Szewczyk, Tsetsekos, and Zantout, 1996; Chen and Ho, 1997) that do not find enough evidence to support this theory, although this lack of support may be due to the fact that the variable used in these studies for proxying free cash flow is a measure of cash flow instead of free cash flow.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

How Do Firm Characteristics Influence the Relationship between R&D and Firm Value?

Queiroz

2010

Financial Management

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"This paper focuses on how a firm's characteristics affect the market valuation of its research and development (R&D) spending. We derive a valuation model based on the capital market arbitrage condition. Using the generalized method of moments and data from the Eurozone countries to estimate this model yields interesting results. Several firm characteristics (size, firm growth, and market share) positively affect the relationship between firm value and R&D spending, while others (free cash flow, dependence on external finance, labor intensity, and capital intensity) exert a negative effect. Therefore, we conclude that the effectiveness of R&D spending depends on firm characteristics". Copyright (c) 2010 Financial Management Association International.

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The Effect of Ownership Structure on Underinvestment and Overinvestment Processes

2004

SSRN Journal