ISSN:
1573-6911
Keywords:
Investment
;
cash flow
;
asymmetric information
;
managerial discretion
;
G39
;
L21
;
D21
Source:
Springer Online Journal Archives 1860-2000
Topics:
Economics
Notes:
Abstract In recent years, several studies have attempted to explain the positive link between corporate investment and internal cash flows by hypothesizing the existence of asymmetric information. Managers know that the firm has high return investment opportinities, but the capital market does not. An alternative explanation for cash flow's relationship to investment is that managers have the discretion to use the company's cash flows to advance their own interests, and these are positively linked to the growth of the firm. The asymmetric information hypothesis predicts a positive relationship between investment and cash flow for firms with returns on investment above their costs of capital, the managerial discretion hypothesis predicts a positive relationship for firms with returns below their costs of capital. This paper presents evidence consistent with both hypotheses.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1007/BF01384151
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