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Investment, cash flow and managerial discretion in state-owned firms: evidence across soft and hard budget constraints

Bertero, Elisabetta and Rondi, Laura (2000) Investment, cash flow and managerial discretion in state-owned firms: evidence across soft and hard budget constraints. Working paper, 10/2000. Ceris-Cnr.

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Identification Number: 10/2000

Abstract

In this paper we extend to state-owned enterprises the empirical work on investment-cash flow sensitivities. Our sample is a panel of Italian state-owned manufacturing firms over the period 1977-1993. The distinctive element of public firms’ financial environment is the budget regime under which they operate. Our analysis of Italian institutions identifies a switch from a soft to a hard budget constraint regime in 1987, for which a critical determinant was Italy’s attempt to qualify for EMU. We estimate a number of models of investment with additional cash flow terms and test for parameter constancy across budget regimes and the business cycle. We find that there is a positive correlation between investment and cash flow also for public firms, but only when the budget regime is soft. We argue that excessive managerial discretion is likely to be responsible for this correlation. We also find that the switch to a hard regime brings about an important change in the investment decisions of this panel of public enterprises.

Item Type: Monograph (Working Paper)
Official URL: http://www.ceris.cnr.it/index.php?option=com_conte...
Additional Information: © 2000 Ceris-Cnr
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 10 Nov 2011 14:30
Last Modified: 10 Nov 2011 14:30
URI: http://eprints.lse.ac.uk/id/eprint/39415

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