Investment Spending in the Netherlands: The Impact of Liquidity and Corporate Governance

32 Pages Posted: 10 Mar 2000

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University; Monash University

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Date Written: February 2000

Abstract

This paper examines the relation between cash flow, corporate governance and fixed-investment spending. In perfect capital markets we expect no systematic relationship. However, Myers and Majluf's (1984) asymmetric information hypothesis and Jensen's (1986) managerial discretion hypothesis present imperfections and predict a positive impact of cash flow on investment in fixed assets. Aspects of corporate governance play an important role in both theories. We measure the impact of cash flow on investment for a set of Dutch firms and aim to distinguish between the asymmetric information hypothesis and the managerial discretion hypothesis. Our findings show that cash flow is an important determinant of investment expenditures. The impact of cash flow is largest for firms with low growth opportunities suggesting that the managerial discretion hypothesis is most at work in the Dutch setting. We also discern that the impact of governance characteristics on both investment and the cash flow-sensitivity of investment differ between firms having low and high growth opportunities. This implies that governance affects the managerial discretion and asymmetric information hypotheses differently.

JEL Classification: G15, G31, G32

Suggested Citation

de Jong, Abe and Degryse, Hans, Investment Spending in the Netherlands: The Impact of Liquidity and Corporate Governance (February 2000). Available at SSRN: https://ssrn.com/abstract=214911 or http://dx.doi.org/10.2139/ssrn.214911

Abe De Jong (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/abe-de-jong/

Monash University ( email )

900 Dandenong Rd
Room H3-56
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://research.monash.edu/en/persons/abe-de-jong

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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