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INVESTMENT, CASH FLOW AND MANAGERIAL DISCRETION IN STATE-OWNED FIRMS-Evidence across soft and hard budget constraints

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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.

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  • Elisabetta Bertero & Laura Rondi, 2000. "INVESTMENT, CASH FLOW AND MANAGERIAL DISCRETION IN STATE-OWNED FIRMS-Evidence across soft and hard budget constraints," CERIS Working Paper 200010, CNR-IRCrES Research Institute on Sustainable Economic Growth - Torino (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY.
    • Handle: RePEc:csc:cerisp:200010
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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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