A Revealed Preference Approach to Understanding Corporate Governance Problems: Evidence from Canada

37 Pages Posted: 6 Dec 2002

See all articles by Robert S. Chirinko

Robert S. Chirinko

University of Illinois at Chicago, Department of Finance; CESifo (Center for Economic Studies and Ifo Institute)

Huntley Schaller

Carleton University - Department of Economics

Date Written: December 2002

Abstract

By studying the gap between the discount rates used by executives and shareholders, we assess the extent to which governance problems distort firm behavior. The estimation strategy recovers discount rates used by executives from the pattern of their actual investment spending. Our empirical work is based on panel data for 193 Canadian firms. For the firms most likely to be affected by Free Cash Flow agency problems, investment behavior appears to be guided by discount rates that are less than the market rate by 350-400 basis points. This wedge is reduced for firms with a concentrated ownership structure. Firms in our sample facing Free Cash Flow problems have a stock of fixed capital approximately 7 per cent to 22 per cent higher than would prevail under value maximizing behavior.

Keywords: Corporate Governance, Business Investment, Discount Rates

JEL Classification: G3, E2

Suggested Citation

Chirinko, Robert S. and Schaller, Huntley, A Revealed Preference Approach to Understanding Corporate Governance Problems: Evidence from Canada (December 2002). CESifo Working Paper Series No. 826; MIT Department of Economics Working Paper No. 02-46. Available at SSRN: https://ssrn.com/abstract=359180 or http://dx.doi.org/10.2139/ssrn.359180

Robert S. Chirinko

University of Illinois at Chicago, Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

HOME PAGE: http://tigger.uic.edu/~chirinko/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Huntley Schaller (Contact Author)

Carleton University - Department of Economics ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S 5B6
Canada
613-520-3751 (Phone)
613-520-3906 (Fax)

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