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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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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
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise > L32 - Public Enterprises
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M40 - General
Sets: Departments > Finance
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 10/2000
Date Deposited: 10 Nov 2011 14:30
URL: http://eprints.lse.ac.uk/39415/

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