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Does a switch of budget regimes affect investment and managerial discretion of state-owned enterprises?: evidence from Italian firms

Bertero, Elisabetta and Rondi, Laura (2002) Does a switch of budget regimes affect investment and managerial discretion of state-owned enterprises?: evidence from Italian firms. Journal of Comparative Economics, 30 (4). pp. 836-863. ISSN 0147-5967

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Identification Number: 10.1006/jcec.2002.1805

Abstract

We investigate the investment decisions of Italian state-owned enterprises (SOEs) across budget constraint regimes and carry out a natural experiment that exploits a regime switch in 1987. Drawing on the theory of capital market imperfections, we apply an empirical framework for investment analysis to a panel of manufacturing SOEs in competitive industries. We identify parallels between SOEs and widely held, quoted companies afflicted by agency problems, managerial discretion, and overinvestment. We argue that, in the case of SOEs, the soft budget regime increases managerial discretion, facilitates collusion with vote-seeking politicians, and results in wasteful investment. Consistent with our predictions, we find that the regime switch disciplines SOE's investment behavior. Following a hardening of the budget constraint, managers lose discretion to indulge in collusion and overinvestment.

Item Type: Article
Official URL: http://www.elsevier.com/wps/find/journaldescriptio...
Additional Information: © 2002 Association for Comparative Economic Studies
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 16 Oct 2008 14:44
Last Modified: 22 Aug 2012 09:18
URI: http://eprints.lse.ac.uk/id/eprint/18303

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