Corporate Governance and Real Investment Decisions

30 Pages Posted: 16 Mar 2006

See all articles by Øyvind Bøhren

Øyvind Bøhren

BI Norwegian Business School

Ilan Cooper

BI Norwegian Business School

Richard Priestley

Norwegian Business School

Date Written: March 1, 2007

Abstract

Within a broad sample of US manufacturing firms, we find that, controlling for investment opportunities and financial constraints, increased governance quality is associated with higher levels of investment. Increased governance quality is also associated with greater responsiveness of investment to investment opportunities, better firm performance and higher marginal product of capital. Our evidence suggests that better corporate governance drives managers to invest more, and to exert more effort in finding highly productive investment projects and in managing their investment efficiently. Poorly governed firms invest less, implying that they underinvest rather than overinvest. Their low marginal product of capital implies that they invest in less productive assets. Overall, our evidence is consistent with governance mechanisms mitigating problems stemming from managers seeking the 'quiet life'. We find no indication that the firm's governance quality is endogenous to its growth opportunities in our sample. Overall, the results suggests that better governance quality improves the efficiency of capital allocation within firms, and that lax governance produces underinvestment rather than overinvestment.

Keywords: real investment, corporate governance, financial constraints, underinvestment

JEL Classification: E22, G31, G34

Suggested Citation

Bøhren, Øyvind and Cooper, Ilan and Priestley, Richard, Corporate Governance and Real Investment Decisions (March 1, 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891060 or http://dx.doi.org/10.2139/ssrn.891060

Øyvind Bøhren

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
46410503 (Phone)

Ilan Cooper

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Richard Priestley (Contact Author)

Norwegian Business School ( email )

Nydalsveien
37
N-0442 Oslo, 0283
Norway
47 46410515 (Phone)

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