Corporate Investment, Asymmetric Information and Agency Costs in the UK

Marc Goergen and Luc Renneboog

Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, 2001, vol. 70, issue 2, 248-260

Abstract: This paper investigates whether investment spending of firms is sensitive to the availability of internal funds. Imperfect capital markets create a hierarchy for the different sources of funds such that investment and financial decisions are not independent. The relation between corporate investment and free cash flow is investigated using the Bond and Meghir (1994a) Euler-equation model for a panel of 240 companies listed on the London Stock Exchange over a 6-year period. This method allows for a direct test of the first-order condition of an intertemporal maximisation problem. It does not require the use of Tobin's q, which is subject to mis-measurement problems.

Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwvjh:70-20-11

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Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research is currently edited by Marcel Fratzscher, Martin Gornig, Claudia Kemfert, Alexander Kritikos, Stefan Liebig, Lukas Menkhoff, Dorothea Schäfer, Bernhard Emunds, Thomas Gehrig, Horst Gischer, Hans-Helmut Kotz, Claus Michelsen, Doris Neuberger, Andreas Pfingsten and Andreas Stephan

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