Ownership Structure, Financial Constraints and Investment Decisions: Evidence from a Panel of Italian Firms
Written by Paula Widiastuti, SE, MSM on 8/26/2008by. Francesco Crespi and Giuseppe Scellato
Over the past two decades, a wide empirical literature has addressed the theme of firm-level financial constraints, supporting the hypothesis that the availability of internal funds is indeed a major driver of investment decisions. The largest part of such empirical analyses detects the presence of liquidity constraints from the observation of differentials in investment-cash flow elasticities among sub groups of companies. However, the theoretical side of the issue is still debated. Investment – cash flow sensitivity can be attributed to the presence of two different factors: asymmetric information on capital markets or internal agency problems leading to overinvestment by the management. In this paper, using a new sample of 1035 Italian manufacturing firms observed in the period 1998-2003, we try to disentangle the different potential determinants underlying the observed positive elasticity between investments and internal resources by accounting for both the ownership structure of the companies and the role played by financial intermediaries as both investors and debt-holders. The most interesting result emerging from our analysis is related to the presence of an inverted – U relationship between concentration of ownership and the elasticity of investment to cashflow. The overall evidence is supportive of the hypothesis that the elevated dependence of investment in both tangible and intangible capital on internal resources cannot be fully attributed to frictions on the credit market.
Over the past two decades, a wide empirical literature has addressed the theme of
firm-level financial constraints, supporting the hypothesis that the availability of internal funds is indeed a major driver of investment decisions (Himmelberg and Petersen, 1994; Schiantarelli, 1996; Carpenter and Petersen, 2002; Audretsch and Elston 2002). The largest part of such empirical analyses is based on refinements of the original model by Fazzari, Hubbard and Petersen (1988) which derives the presence of liquidity constraints from the observation of differentials in investment-cash flow elasticities among sub groups of companies. In this context, a significantly higher dependence through time of investments to internally generated cash flow can be interpreted as a signal of a higher premium on external financial resources.
| Posted in »
0 comments: Responses to “ Ownership Structure, Financial Constraints and Investment Decisions: Evidence from a Panel of Italian Firms ”