Financial Liberalization and Managerial Discretion in the Security Issue Decision: Evidence from an Emerging Economy

Saumitra Bhaduri

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2001, vol. 04, issue 02, 221-234

Abstract: This paper investigates the Managerial Discretion Hypothesis in the context of the Indian corporate sector. The hypothesis postulates that if the interests of the managers and the other stakeholders of the firm are not perfectly aligned, then the managers tend to issue equity which might be contrary to the latter's interest. We have examined a sample of 216 manufacturing firms, which have opted for external finance during the year 1994–1995. Our findings reveal that for many firms, particularly those with poor investment opportunities, managers issue equity even when they are not expected to do so. This paper, as a policy recommendation, highlights the importance of creating appropriate institutions prior to pursuing financial liberalization in developing countries like India.

JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1142/S0219091501000395

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