Corporate Governance and Investment

This paper contributes at least threefold to the investment-cash flow literature. First, it finds
that the corporate governance environment of a firm affects the relationship between investment and cash flow. Second, we allow for both asymmetric information and managerial
discretion explanations for positive investment-cash flow coefficients, thereby overcoming most of the ambiguities in this interpretation. Finally, by using a GMM estimator we avoid most of the problems with traditional OLS models. We find that family-controlled firms appear to suffer from cash constraints as evidenced by a positive and robust relationship of investment to cash flow. State-controlled firms also exhibit a positive and significant cash flow sensitivity, which we explain by managerial discretion.