Ownership Structure, Financial Constraints and Investment Decisions: Evidence from a Panel of Italian Firms

25 Pages Posted: 25 May 2007

See all articles by Francesco Crespi

Francesco Crespi

Roma Tre University - Department of Economics

Giuseppe Scellato

Polytechnic University of Turin - Department of Production Systems and Business Economics (DISPEA)

Date Written: January 2007

Abstract

Over the past two decades, a wide empirical literature has addressed the theme of firm-level financial constraints, supporting the hypothesis that the availability of internal funds is indeed a major driver of investment decisions. The largest part of such empirical analyses detects the presence of liquidity constraints from the observation of differentials in investment-cash flow elasticities among sub groups of companies. However, the theoretical side of the issue is still debated. Investment - cash flow sensitivity can be attributed to the presence of two different factors: asymmetric information on capital markets or internal agency problems leading to overinvestment by the management.

In this paper, using a new sample of 1035 Italian manufacturing firms observed in the period 1998-2003, we try to disentangle the different potential determinants underlying the observed positive elasticity between investments and internal resources by accounting for both the ownership structure of the companies and the role played by financial intermediaries as both investors and debt-holders.

The most interesting result emerging from our analysis is related to the presence of an inverted - U relationship between concentration of ownership and the elasticity of investment to cashflow. The overall evidence is supportive of the hypothesis that the elevated dependence of investment in both tangible and intangible capital on internal resources cannot be fully attributed to frictions on the credit market.

Keywords: liquidity constraints, corporate governance, investments

JEL Classification: E22, E44, G32

Suggested Citation

Crespi, Francesco and Scellato, Giuseppe, Ownership Structure, Financial Constraints and Investment Decisions: Evidence from a Panel of Italian Firms (January 2007). Available at SSRN: https://ssrn.com/abstract=987996 or http://dx.doi.org/10.2139/ssrn.987996

Francesco Crespi

Roma Tre University - Department of Economics ( email )

via s.d'amico, 77
Rome, 00152
Italy
0657335755 (Phone)

Giuseppe Scellato (Contact Author)

Polytechnic University of Turin - Department of Production Systems and Business Economics (DISPEA) ( email )

Corso Duca degli Abruzzi, 24
Torino, 10129
Italy
+39 0115647211 (Phone)
+39 0115647299 (Fax)

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