Corp Govern - Liquidity

Corporate Governance and LiquidityConstraints: A Dynamic Analysis

BERSANT HOBDARI1, DEREK C JONES2 & NIELS MYGIND1

1International Economics and Management, Copenhagen Business School,Porcelanshaven 24 A, Frederiksberg, 2000, Denmark.

2Hamilton College, Clinton, NY 13323, USA.

Rich panel data for a large and representative sample of Estonian firms are used to

estimate the sensitivity of access to capital to differing ownership structures. This

is done through explicitly modelling firm investment behaviour in a dynamic setting

in the presence of adjustment costs, liquidity constraints and imperfect

competition. We estimate Euler equations derived in the presence of symmetric

and quadratic adjustment costs and both debt and equity constraints. Generalized

Method of Moments (GMM) estimates confirm the importance of access to capital in

determining investment rates and suggest that firms owned by insiders, especially

non-managerial employees, are more prone to be liquidity constrained than others.

Comparative Economic Studies (2010) 52, 82–103. doi:10.1057/ces.2009.10;

published online 3 December 2009

Keywords: corporate investment, corporate governance, liquidity constraints,

GMM estimates

JEL Classifications: C33, D21, D92, E22, G32, J54, P34

INTRODUCTION

The importance of liquidity constraints in firms’ real investment decisionshas long been the focus of economic research (Stein, 2003). The literaturefinds that access to capital is not unlimited and is determined by the degree ofinformational asymmetries and agency costs. The large extant empirical workhas focused on identifying indicators at the firm level, such as dividendpayout ratios, bond rating, degree of bank affiliation, membership in financialconglomerates, firm size, firm age and/or governance structure, thatapproximate for the severity of capital market imperfections and explain

Comparative Economic Studies, 2010, 52, (82–103)r 2010 ACES. All rights reserved. 0888-7233/10

www.palgrave-journals.com/ces/

the observed differences in investment behaviour across firms.1 In this paper,by using a rich panel data for a large and representative sample of Estonianfirms, we investigate firms’ investment behaviour during the period 1993through 2002 and make several contributions.

Fundamentally, we provide new evidence on a topic that has attractedthe attention of theorists but for which there is little empirical evidence – theimpact on investment of alternative governance structures. The studycontributes to the literature in several ways. First, it accounts for the effectof governance structures in investment decisions through their role inmitigating or exacerbating informational asymmetries and agency costs.Second, it assesses the long-run viability of certain ownership forms. This isan important issue in light of the continuing debate in the literature aboutthe efficiency of various ownership forms resulting from the extensiveprivatization process in almost all former centralized economies. Third, in amore general context, it contributes to the debate in the corporate governanceliterature on the effect of governance through ownership. Fourth, the resultsof the analysis allow us to answer questions such as how pervasive acrossfirms and over time are liquidity constraints in Estonia and to what extentare different governance structures likely to be financially constrained? Theanswers to these questions, in turn, provide directions where public policyshould focus to promote successful restructuring on the part of firms. Further,as the movement from state ownership led to the emergence of similarownership structures in almost all transition economies, our conclusionswould be applicable to other Central and East European and former SovietUnion countries. Finally, by focusing on the small, open and dynamiceconomy of Estonia we provide evidence of a country that has beenunderstudied in the governance literature.

The remainder of the paper is structured as follows. In the next section,we outline the testable hypotheses and present the specifications to beestimated in the empirical work. The next two following sections focus onsample construction and data description, and the estimating strategy andpresentation of results. In the last section, we conclude with furtherdiscussion and some policy recommendations.

1 This literature, which started with the seminal work of Fazzari et al. (1988), is large and

includes, for instance, Devereux and Schiantarelli (1990), Hoshi et al. (1991), Whited (1992), Oliner

and Rudebusch (1992), Schaller (1993), Galeotti et al. (1994), Petersen and Rajan (1994), Bond and

Meghir (1994), Vogt (1994), Hubbard et al. (1995), Kaplan and Zingales (1997), Hu and Schiantarelli

(1998), Hadlock (1998), Cleary (1999), Kaplan and Zingales (2000), Fazzari et al. (2000), Goergen

and Renneboog (2001), Alti (2003), Moyen (2004), Clementi and Hopenhayn (2006), Hanazaki and

Qun (2007) and Hennessy et al. (2007).

B Hobdari et alCorporate Governance and Liquidity Constraints

83

Comparative Economic Studies

GOVERNANCE STRUCTURES, INVESTMENT AND LIQUIDITY CONSTRAINTS

The extensive literature on investment behaviour does not say much on therole of different governance structures in investment decisions, becausemost empirical studies are based on samples of large publicly traded firmswhere ownership is widely dispersed and managers enjoy a high degree ofdiscretion. In the process of decentralizing their economies, in manycountries, the transition away from state ownership led to the emergence ofdiverse forms of ownership. Thus, in many instances, insiders have majorityor dominant ownership or, even when they possess minority ownership,enjoy a substantial degree of control. Accompanying the emergence of thesedifferent forms of ownership and control, we also observe that a largeliterature has emerged that highlights competing hypotheses concerningthe expected economic effects of these different regimes.

As far as the ability to raise capital is concerned, various argumentssuggest that firms that are insider-owned face a higher likelihood of beingmore constrained than others. Thus, most of the literature on employeeownership stresses a host of factors such as member’ wealth position, theirtime horizon, risk attitudes, goal structure and the structure of propertyrights2 in the firm that encourage employee-owners to take the residual inthe form of higher income rather than investing it in the firm (Dow, 2003).This preference, along with employee owners’ potential aversion to acceptingnew members, leads to a potential goal conflict between insiders and outsideproviders of both equity and debt capital. In addition, the fact that most ofthese firms are small and not listed on the stock markets exacerbatesinformation asymmetries and makes access to desired capital more difficult.The net effect of the interaction of these factors could be that outsideinvestors may be reluctant to invest in employee-owned firms or, when theydo invest, the risk premium they charge will be substantially higher than themarket one. Overall, disincentives to invest internally and barriers to raisecapital externally might lead to employee-owned firms underinvesting.

2 The traditional analysis of employee ownership assumes that employee-owned firms are

characterized by collective ownership and non-transferable individual rights. An important

development in transition economies is that, in most of the cases, employee-owners are share

owners, that is, they own part of the firm on an individual basis and are able to trade shares in the

capital markets. However, these firms still retain a strong degree of collective ownership by imposing

limits on share trading. Evidence of this is provided by, for example, Kalmi (2002) for Estonia. In a

field survey of firms under insider ownership, the author reports that in only 6% of his sample were

there no restrictions on share trading. Furthermore, in 92% of the cases insiders are asked to offer

their shares first to current shareholders.


84


At the same time, there are competing views of the role of employee-owners.In particular, a large literature points to employee ownership having apotentially powerful motivational effect, resulting in better mutual monitor-ing and heightened discretionary effort (Kruse and Blasi, 1997). It is clearlypossible that, if these effects dominate, then outside investors’ hesitation toinvest in employee-owned firms would be overcome.

Similarly, there are competing hypotheses concerning the role ofmanagerial ownership. In one camp are those who see increases inmanagerial ownership as beneficial. One argument is that managerialownership better aligns the interests of managers and shareholders and,consequently, lowers managerial discretion. Also, management buy-outsserve as screening mechanisms that allow only highly qualified, growth-oriented managers to become owners.3 Finally, it is noted that markets forcorporate control serve as disciplining devices for managers.

However, most researchers take a more pessimistic view concerningthe effects of managerial ownership (Morck et al., 1988). They argue that athigh levels, it4 is associated with entrenchment and divergence of interestsbetween managers and shareholders. In transition economies, managerialshareholding in post-privatization ownership configurations, in the form ofmajority, dominant or minority shareholders, is substantial. The possibilityof entrenchment and subsequent rent-seeking or asset-stripping behaviouron the part of managers has been an argument against managerial owner-ship (Djankov, 1999). The likelihood of this happening depends to a largeextent on managers’ outside career opportunities and portfolio diversifica-tion, the way they obtain shares and the efficiency of the market for corporatecontrol. When outside career opportunities do not exist and managershave invested most of their human and financial capital in the firm, they willtry to hold on to their equity share by following policies, includinginvestments, which will increase their job security. Furthermore, a manager’sbehaviour might be fundamentally different depending on whether she/heacquires the firm through a managerial buy-out or gets it either free or inthe framework of a voucher-funded privatization. If ownership is gainedthrough one of the latter two methods, the manager might perceive it as a

3 Financing of an Managerial Buy-outs (MBO) often requires external financing, which only

qualified managers might be able to raise.4 The models on which these conclusions are based start from zero managerial ownership and

then consider the dynamics once managerial ownership increases. However, the definition of low

and high managerial ownership should not be taken as meaning majority (dominant) versus

minority managerial ownership. High managerial ownership could be considered a stake around

10%.


85


windfall gain and consume it faster than earned income (Djankov, 1999).In addition, in an environment of high uncertainty and underdevelopedcapital markets, informational asymmetries might lead to adverse selectionproblems in the market for corporate control (Earle and Estrin, 1996).Overall, for most researchers on transition economies, these arguments implythat ownership concentration in the hands of managers is likely to lead tomanagers’ entrenchment, which is expected to exacerbate informationalasymmetries and lead to more expensive external finance and lessinvestment.

When managers control, but do not own, the firm, agency problemsarise. Under these circumstances the identity of outside owners is crucial totheir ability to curb managerial discretion. We distinguish three types ofoutside owners: the state, foreign and domestic outside owners. Theefficiency of each in disciplining management results in differences inmanagerial discretion across firms, which, in turn, results in differences inaccess to capital and investment behaviour. High degrees of managerialdiscretion mean that managers can engage in unprofitable investmentprojects or even in projects with negative present value that are valuableto them and lead to their entrenchment. Moreover, high managerialdiscretion accentuates the degree of information asymmetry and makesexternal finance more expensive. The outcome is a reliance on internal funds,which results in investment being highly sensitive to the availability ofinternal finance.

When a firm is under foreign ownership, managerial discretion is kept atminimal levels because foreign owners are expected to possess enoughexperience and resources to engage in effective monitoring. Moreover,conventional wisdom is that foreign owners have access to their parentcompany’s resources and/or to international capital markets and thus theinvestment behaviour of foreign-owned firms is not expected to beconstrained by the availability of either internal or external finance. Onthe other hand, foreign ownership may not always enhance businessperformance. Foreigners may understand local culture much less thanlocals. They may also be less effective in coping with corruption and suffermore from information failure of various kinds. When ownership isconcentrated in the hands of domestic outside investors the degreeof effective monitoring depends on the identity, number and size ofinvestors. Depending on the combination of these factors several scenariosmight arise. For instance, if ownership is concentrated in the hands of afew big institutional investors with experience, resources and low coordina-tion costs, then effective monitoring will be possible. Alternatively,if ownership is dispersed in the hands of a large number of small investors,


86


then managers are more likely to enjoy substantial discretion in pursuingtheir objectives. Finally, when ownership is concentrated in the hands of thestate5 managers will often possess virtual control of the firm and enjoy highdegrees of discretion in pursuing their own interests.

In testing these competing propositions firms’ investment behaviouris modelled in a dynamic setting in the presence of adjustment costs,liquidity constraints and imperfect competition, similar to Whited (1992) andBond and Meghir (1994). The firm, at every point in time, is supposedto maximize the discounted present value of future after-tax dividendsas follows6:

maxKt ;Lt ;Bt

Et

X1s¼1

btþs � Dtþs ð1Þ

where t represents a time index, Et denotes the expectation operator thatis based on all the information available at time t, bt+s¼ 1/(1+ys) isthe discount factor at time s with ys being the nominal discount factor attime s and bt¼ 1 at time t, and Dt standing for after-tax dividends at time t.The model is solved subject to a flow of funds constraint, capitalaccumulation constraint, dividend non-negativity constraint and a creditceiling constraint.

Equation 1 models the firms as dividend (profit) maximizers. Yet, whiledividend maximization is a good approximation of firm behaviour for certaingroups of firms, it might not be appropriate for others (Ward, 1958; Dow,2003). It is often argued that insider-owned firms maximize income perworker rather than profit or dividends. The substantial insider power,especially employee power, in transition economies would make dividendsper worker maximization seem the more appropriate objective function thanmaximization of total dividends. Consequently, the model is solved foralternative objective functions and in the empirical work tests are performed

5 As Shleifer and Vishny (1997) point out, state ownership can be viewed as relation between a

principal and two agents. The principal is the body of citizens, who are the ultimate owners of the

firm. Being dispersed they have no ability or resources to monitor the state, that is the politicians

and bureaucrats, who act as the first agent and who themselves have to monitor managers, the

second agent. Both agents usually have objectives quite different from those of the principal and can

easily collude to pursue their objectives at the expense of the principal.6 Except for the time index, the firm’s maximization problem has to be written with a firm

identification index. Given that it plays no role in altering the solution to the problem not to

complicate notation the index is dropped.


87


to determine which of them better approximates firm behaviour. Theequations to be estimated are the following:

I

K

� �tþ1

¼ ao þ a1 �S

K

� �t

þa2 �L

K

� �t

þa3 �I

K

� �t

þ a4 �I

K

� �2

t

þz1 �DBtþ1

Ktþ1� DBt

Kt

� �

þ z2 �CFtþ1

Ktþ1� CFt

Kt

� �þ z3 �

DBtþ1

Ktþ1� DBt

Kt

� �2

þ z4 �CFtþ1

Ktþ1� CFt

Kt

� �2

þztþ1

ð2Þ

I

L

� �tþ1

¼ ao �K

L

� �tþ1

þa1 �S

L

� �t

�Ktþ1

Kt

þ a2 � dt �Ktþ1

Ktþ a3 �

I

L

� �t

�Ktþ1

Kt

þ a4 �I

K

� �2

t

�Ktþ1

Ltþ a5 �

Ktþ1

Lt

þ z1 �DBtþ1

Ltþ1� DBt

Lt

� �þ z2 �

CFtþ1

Ltþ1� CFt

Lt

� �

þ z3 �DBtþ1

Ltþ1� DBt

Lt

� �2

þ z4 �CFtþ1

Ltþ1� CFt

Lt

� �2

þ xtþ1

ð3Þ

where I denotes investment, K capital, S sales, L labour, B debt as a measureof external financing and CF cash flow as a measure of internal funds.7

Equation 2 is derived under the assumption that firms are dividendmaximizers, whereas equation 3 is derived under the assumption that firmsare dividend per worker maximizers.

7 Although our model is similar to the one of Bond and Meghir (1994) there is an important

difference with respect to the final estimating equations. Our estimating equations 2 and 3 differ

from the ones of Bond and Meghir (1994) in that our liquidity terms enter in first differences while

theirs in levels. This difference arises from the way financial constraints are specified in our model.

We have adopted an approach that allows for explicit solution of Lagrangean multiplier related to

dividend constraint in terms of financial variables. Our model’s solution is available from the

authors upon request.


88


DATA AND SAMPLE DESCRIPTION

The data employed in this study cover a large and representative sample ofEstonian firms during the period 1993 through 2002. The data consists ofownership configurations, obtained from surveys, and of financial informa-tion from firms’ balance sheets and income statements reported to theEstonian Statistical Office. The firms included in the survey scheme areselected as a stratified random sample based on size and industrial affiliation.For the purposes of the analysis firms have to be classified into ownershipgroups. Such a classification is not a trivial pursuit. Often firms aremisclassified among ownership groups because important informationcontained in ownership variables is overlooked (Filer and Hanousek, 2002).In this paper, ownership structure is defined by classifying firms into sixownership categories: state, foreign, employee, former employee, managerand domestic outsider, using the percentage of shares held by the largest ordominant owner. This classification has frequently been used in the literature(Jones and Mygind, 1999; Jones et al., 2005; Grosfeld and Hashi, 2007). Aftercorrecting for data inconsistencies,8 the merging of ownership and financialinformation creates an unbalanced panel of 4,218 observations to be used inthe analysis.

Table 1 provides information on the distribution at a given point in timeand evolution over time of the number of firms that fall into a givenownership category. Focusing on the 1995 sample, it is apparent that, in morethan 22% of cases, insiders (employees and managers) or former insiders aredominant owners. This provides evidence of the importance of insiderownership during the early years of transition. Foreign-owned companiescomprise around 12% of the sample, while domestic outsider-owned firmscomprise around 18% of the sample. Finally, state-owned firms comprisearound 48% of the sample, with 232 firms being fully under state ownershipand 30 firms mostly in private hands with the state still holding the dominantposition.

The table also contains important information on ownership dynamics. Itis apparent that, over time, the number of state and employee-owned firmssteadily decreases, while the number of domestic outsider and manager-owned firms increases. While the decrease in the number of state-owned

8 The following seven criteria were applied to the data: the firm’s capital at the beginning and

the end of the period should be positive, investment should be non-negative, investment should be

smaller than end of period capital stock, sales should be positive, the average employment per year

should be positive and equal to or greater than 10, labour cost in a given year should be positive and

ownership shares should add up to 100.


89


firms over time is expected due to the continuation of the privatizationprocess, the decrease in the number of employee-owned firms seems tounderline the suspicion that in the long-run this ownership structure is notviable and will be diluted in favour of others. The inability of employee-owned firms to secure enough external funding and, consequently, to carryout the necessary investment in order to remain competitive may be amongthe drivers of this dynamic.

As for the increase in the number of manager-owned firms, an argumentis often made that it results from the concentration of ownership in the handsof managers in insider-owned firms, that is, by the shift of ownership rightsfrom employees to managers. Evidence on this claim is provided by transitionmatrixes, which plot ownership structures at two different points in timeagainst each other. Exploring the transitions some important facts emerge.First, state firms privatized after 1995 mostly end up in the hands of outsiderinvestors, that is, domestic outsiders and foreigners, with employees andformer employees being the least preferred option. Second, there is littleemployee or former employee activity in taking over firms once they are inprivate hands. Third, domestic outsiders, foreigners and managers are quiteactive in the market for corporate control, with continuous acquisitionsacross groups. Fourth, the concentration of ownership from employees tomanagers, although it happens, is not the driving force behind the rise inmanagerial ownership. Finally, former employees hang on to their dominat-ing ownership position for some time after they have left the firm, butultimately relinquish it.

Table 2 presents the summary statistics for the whole sample of the mostrelevant variables used in the analysis. The general facts that emerge wheninspecting these statistics over time are that investment levels are highrelative to capital stock, with investment/capital ratio ranging from 0.17 in1993 to 0.34 in 1995, that average employment decreases while real wages

Table 1: Ownership distribution over time according to dominant owner

Year ownership group 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total

Domestic outsiders 81 94 97 110 95 90 119 118 104 104 1,012Employee 48 54 47 41 27 26 29 24 19 19 334Former employees 0 0 11 14 19 15 16 13 3 3 94Foreign 42 60 63 68 67 59 72 79 72 72 654Managers 45 53 65 76 81 71 84 87 77 77 716State 228 181 262 204 172 123 6 19 15 15 1,225No answer 54 56 1 19 18 31 4 183Total 498 498 545 514 480 402 357 344 290 290 4,218

Note: A firm is considered to be dominantly owned by the owner who holds the largest share.


90


increase over time, that, on average, the cash flow is positive, that short-termdebt increases over time and that cash flow and short-term debt areapproximately the same in almost all years. Another important feature ofEstonian firms during this period is that, on average, they have become morecapital intensive, as demonstrated by the increase in capital and decrease inemployment.

RESULTS AND DISCUSSION

In Tables 3 and 4, we report the results of estimating investment equations byownership group for each objective function. The results are obtained usingArellano’s and Bond’s (1991) GMM estimator. Inference on estimatedcoefficients is based on one-step procedure results, while inference on modelspecification is based on two-step procedure results. This method was chosenbecause of the downward bias in standard errors for small samples when thetwo-step procedure is applied. The standard errors of the underlyingparameters of the model, that is, the adjustment cost parameter, the optimalinvestment/capital ratio and the market power parameter,9 are thencalculated using the delta method with analytical first derivatives (Oehlert,1992).

The effect of ownership structures on a firm’s investment behaviour andthe degree of financial constraints is normally investigated by introducingownership dummies and estimating the specifications using the pooledsample. In addition, all dummies are interacted with all other real andfinancial variables in the regression allowing not only the intercepts but also

Table 2: Means and standard deviations in parentheses of principal variables

Variablesa Investment Capital Sales Employmentb Real wagec Cash flow Debt

Mean 3,715 15,168 28,428 154 24.72 2,364 2,158St. dev. (15,218) (46,382) (73,559) (327) (16.19) (14,106) (3,591)

N 4,207 4,218 4,218 4,218 4,218 4,218 4,218

a All the variables except employment are expressed in thousands of Estonian kroons and in 1993 prices.b Average number of employees in a given year.c Real average wage per employee.

9 In terms of equations 2 and 3 coefficients a are functions of these structural parameters. These

functions can be solved to obtain the parameters of interest, which are then reported in the

respective tables. The exact solution for the parameters is available from the authors upon request.


91


the slopes to differ across groups. A major problem in estimating suchspecifications with ownership variables as the right-hand side variables is theendogeneity of ownership, that is, in equilibrium different owners willdetermine their optimal ownership share based on various firm character-istics, among which is the firm’s investment needs. This implies asimultaneity problem in that the explanatory variable is co-determined withthe variable to be explained, namely investment rates. A potential solution tothe problem is the use of instrumental variables, that is, the endogenousvariables in the model, the ownership dummies in our case, are instrumented

Table 3: GMM estimates of investment functions by ownership group for dividend maximization model

Ownership group parameters Stateowned

Employeeowned

Managerowned

Foreignowned

Domesticoutsiderowned

Adjustment cost parameter, a 2.131***(4.75)

2.916***(2.49)

2.216**(1.27)

1.457***(7.12)

2.117**(1.71)

Optimal investment-capital ratio, b 0.206**(2.143)

0.089**(2.033)

0.142*(1.679)

0.193**(2.236)

0.184***(4.729)

Market power parameter, Z 0.783(0.882)

0.871(0.804)

0.918(1.398)

1.117**(2.073)

1.067***(5.028)

Internal funds parameter 0.027***(4.178)

0.047***(3.218)

0.022(0.982)

0.010(0.478)

0.031**(1.678)

Internal funds squared parameter 0.001(1.038)

0.004*(1.683)

0.002(0.819)

0.000(1.227)

0.000(0.559)

External funds parameter �0.003(�0.837)

�0.059**(�1.819)

�0.026***(�2.371)

�0.000(�0.128)

�0.022***(�3.827)

External funds squared parameter 0.002(0.483)

�0.014**(�2.092)

�0.011***(�5.328)

0.001(1.192)

�0.001(�1.017)

Firm size 0.218(0.974)

0.337*(1.673)

0.518**(2.017)

0.278(1.117)

0.308**(2.218)

F-test 5% critical value 19.281.75

17.371.75

13.171.75

21.631.75

27.121.75

Sargan’s statistic degrees of Freedom 27.17140.17

33.92140.18

29.81140.38

19.03140.14

22.48140.15

Second order autocorrelation test 0.830.57

�0.930.33

�1.150.26

�0.580.48

0.510.62

No. of observations 342 239 307 284 296Adjusted R2 0.216 0.227 0.231 0.208 0.199

Notes: Values in brackets denote respective t-statistics. Each model is estimated with time dummies,whose estimates are not reported here. Internal funds are measured by the sum of cash flow, short-termassets and revenue from sale of non-current assets, whereas external funds are measured by the amountof outstanding debt. The t-statistics of adjustment cost, optimal investment/capital ratio and marketpower parameters are calculated using delta method with analytical first derivatives. Instrument setsinclude all real and financial variables lagged three periods or more. All regressions include the inverse ofMill’s Ratio to account for sample selection bias.***significant at 1% significance level; **significant at 5% significance level; *significant at 10%significance level.


92


with a set of variables that are correlated with them but not with the errorterm.

However, this instrumental variable approach is not without problems.Finding appropriate instruments for ownership dummies is difficult. Theliterature on the determinants of ownership structures identifies firm size,productivity, profitability, capital intensity, financing requirements and/orfirm quality as determinants of ownership shares. All these variables couldserve as instruments for the endogenous ownership dummies. The applica-tion of the instrumental variable approach requires all instruments to be

Table 4: GMM estimates of investment functions by ownership group for dividend per workermaximization model

Ownership group parameters Stateowned

Employeeowned

Managerowned

Foreignowned

Domesticoutsiderowned

Adjustment cost parameter, a 2.047*(1.648)

2.218**(1.748)

1.883***(5.328)

1.357***(2.918)

1.448**(1.782)

Optimal investment-capital ratio, b 0.217***(4.226)

0.193***(6.681)

0.178**(2.018)

0.373***(4.552)

0.283**(2.179)

Market power parameter, Z 1.005(0.221)

0.967(1.026)

1.117(0.729)

1.218**(2.216)

1.307***(3.471)

Internal funds parameter 0.017**(2.019)

0.028**(2.127)

0.001(1.003)

0.001(0.836)

0.021***(4.128)

Internal funds squared parameter 0.001*(1.648)

0.001**(2.186)

0.000(0.983)

0.001(0.483)

0.000(0.348)

External funds parameter �0.001(�0.925)

�0.005**(�1.891)

�0.003(�0.482)

0.002(1.184)

0.001(0.218)

External funds squared parameter 0.001(0.682)

�0.002**(�2.018)

�0.002(�0.735)

�0.001(�0.581)

�0.005(�0.318)

Firm size 0.178(0.775)

0.269(1.053)

0.492**(2.241)

0.117(0.952)

0.478**(1.927)

F-test 5% critical value 31.261.67

19.921.67

17.671.67

22.931.67

25.821.67

Sargan’s statistic degrees of Freedom 15.25140.27

11.48140.65

12.51140.68

11.89140.66

17.15140.21

Second order autocorrelation test �1.170.31

�1.560.38

�1.110.29

�0.560.61

�0.710.47

No. of observations 342 239 305 280 292Adjusted R2 0.227 0.231 0.248 0.206 0.218

Notes: Values in brackets denote respective t-statistics. Each model is estimated with time dummies,whose estimates are not reported here. Internal funds are measured by the sum of cash flow, short-termassets and revenue from sale of non-current assets, whereas external funds are measured by the amountof outstanding debt. The t-statistics of adjustment cost, optimal investment/capital ratio and marketpower parameters are calculated using delta method with analytical first derivatives. Instrument setsinclude all real and financial variables lagged three periods or more. All regressions include the inverse ofMill’s Ratio to account for sample selection bias.***significant at 1% significance level; **significant at 5% significance level; *significant at 10%significance level.


93


uncorrelated with the unobserved variables. In structural investmentequations, however, all factors mentioned will be correlated with unobservedfirm specific shocks to investment and, as such, will still be correlated withthe error terms. A consequence of this is that the use of bad instruments willstill lead to biased parameter estimates (Angrist and Krueger, 2001).

An alternative approach is the division of the sample into several sub-samples according to the ownership groups defined and the estimation of therelevant specifications for every sub-sample separately. In addition toavoiding the pitfalls of the instrumental variable approach, this approachoffers the possibility of testing the hypothesis of the existence of differentobjective functions across groups of firms. This is the approach adopted here.The sample is divided into five sub-samples as follows: state-owned,domestic outsider-owned, foreign-owned, manager-owned and employee-owned firms.10 In the interpretation of results we then focus on thedifferences in respective coefficients across ownership groups, which provideunbiased estimates of the true differences.11

Focusing first on model performance we see that the overidentifyingrestrictions, tested through Sargan’s test, are accepted at high probabilitylevels, while the second order autocorrelation test is always rejected. Also,adjusted R2 are comparable across equations and range from around 20% toaround 25%. Finally, model adequacy is also confirmed by the rejection ofthe null that all coefficients are jointly zero.

Turning to estimates of structural parameters we see that the adjustmentcost parameter and the optimal investment/capital ratio are generally positiveand significant across all equations, while the market power parameter issignificant only in the case of domestic outsider-owned and foreign-ownedfirms. The estimates of adjustment cost parameters imply different relativeratios of adjustment costs to investment expenditures across ownershipgroups. Assuming that parameter b is zero and evaluating the size ofadjustment costs at the mean investment to capital ratio for each group, we

10 As the number of observations for former employee-owned firms does not allow independent

analysis of this group, these firms are included in the employee-owned firms group.11 It must be noted that estimating specifications across different sub-samples does not lend

itself to direct testing of whether coefficients estimated on different sub-samples are statistically

different from each other. In checking this, as well as the robustness of our results, we pooled the

sample, introduced dummy variables for each ownership group, interacted these dummies with all

variables included as right hand side ones and estimated our specifications on the pooled sample.

The unreported estimated coefficients were essentially unaltered in terms of significance and sign.

Further, the test performed always resulted in rejecting the null of no statistical significance between

coefficients of financial variables for employee, manager and state-owned firms on the one hand and

those for foreign and domestic outsider-owned firms on the other. The coefficient estimates and test

results are available from the authors upon request.


94


find that adjustment costs for foreign-owned firms vary between 15% and19% of investment expenditures, for domestic outsider-owned firms between19% and 24%, for manager-owned firms between 27% and 34%, foremployee-owned firms between 32% and 37% and for state-owned firmsbetween 27% and 33%. When optimal investment/capital ratios arecompared with their sample means across ownership groups we find thatstate-owned firms have the lowest deviation of actual investment rate fromthe optimal, while manager and employee-owned firms have the highest.This suggests that, even accounting for the non-zero value of b in calculatingadjustment costs, manager and employee-owned firms will face largeadjustment costs relative to investment expenditures. Finally, the estimatesof the market power parameter are insignificant for state, manager andemployee-owned firms. In contrast, the values of this parameter for domesticoutsider and foreign-owned firms are positive, significant and well aboveunity, indicating that these firms operate in the elastic portion of theirdemand curve and enjoy some monopoly power.

Important differences in investment behaviour across ownership groupsemerge when inspecting the estimates of coefficients of financial variables.Comparing the coefficients across groups several things are worth noting.First, as expected, different types of firms display different sensitivity tomeasures of financial constraints. As seen from the tables, estimates of allcoefficients of financial variables for foreign-owned firms are insignificant,indicating that these firms are not constrained in any sense in theirinvestment behaviour. Given that foreign-owned firms in Estonia might beeither subsidiaries or joint ventures with foreign partners, it is highlyprobable that profits earned in other countries could be invested in Estoniaand vice versa. Consequently, the measures of internal funds and debt asdefined here will not be relevant to these firms. Instead, measures of globalfunds across different markets where these firms operate will be needed todescribe their behaviour.

Other types of firms, albeit to differing degrees, display sensitivity to theavailability of internal and/or external finance. Manager-owned firms are theonly ones not displaying significant sensitivity to the availability of internalfunds, whereas state, domestic outsider and employee-owned firms alldisplay positive and significant sensitivity to measures of internal funds,implying different degrees of financing constraints. Among the latter threegroups, the sensitivity is highest for employee-owned firms, followed bystate-owned firms. For example, the estimate of the internal funds parameterin Table 3 for employee-owned firms is 0.047. This estimate is 75% largerthan the one for state-owned firms and about 50% larger than the one fordomestic outsider-owned firms. The differences in estimates vary depending


95


on the objective function assumed, but the pattern remains the same. Theestimate of internal funds squared parameter, included to capture potentialnon-linearities, is significant only for employee-owned firms, indicating thatfor these firms the availability of internal finance is crucial in investmentpolicies.

Our results are consistent with a body of studies that find cash flow animportant predictor of investment and interpret its coefficient as an indicatorof financial constraints (Fazzari et al., 2000; Aggarwal and Zong, 2006). Oneargument against such an interpretation is that these coefficients also proxyfor future investment opportunities (Kaplan and Zingales, 2000). However, ifmeasures of cash flow are equally correlated with future opportunities acrossall firm types, then the differences in these coefficients are unbiasedindicators of differences in financing constraints. This conjecture is testedby estimating an equation with sales as the dependent variable and differentlags of cash flow, ownership dummies and their interaction with laggedcash flow variables as independent variables. The results, not reportedhere, show that cash flow predicts future sales across all firms and that theeffect is larger for foreign and domestic outsider-owned firms than for theother types. This finding supports the conjecture that differences in theinternal funds parameter between, for example, employee-owned or state-owned firms and foreign-owned firms are a good predictor of financialconstraints.

Further evidence of financial constraints comes from the inspection ofcoefficients of external finance variables. In this case, state-owned firmsdisplay no sensitivity to the availability of external finance, as shown by theinsignificant coefficients of debt and its squared parameters. This couldserve as an indicator that state-owned firms are not as constrained as mightbe conjectured in raising external finance, that is they might be operating in asoft budget constraints regime. Alternatively, it could be conjectured that, dueto the high price they have to pay for external finance, they rely mostly oninternal funds to finance their investment, as expressed by the positive andsignificant coefficient of the internal funds parameters, and, as such, havenot yet hit their credit limit. Finally, the significant coefficient of internalfinance and the insignificant coefficient of external finance could also beinterpreted as evidence of managerial discretion and their preferences againstoutside control. In contrast, all other domestic-owned firms, whetherdomestic outsider-owned, manager-owned or employee-owned, do seem tohave hit their debt limit in that, whenever significant, higher levels of debtare associated with lower investment rates. The sensitivities are highest,in absolute value, for employee-owned firms and then for domesticoutsider-owned firms across all specifications. Interestingly, the case of


96


manager-owned firms is the opposite of that of state-owned firms, in that theyshow significant sensitivity to the availability of external finance butinsignificant sensitivity to the availability of internal funds.

A general fact emerging from inspecting the tables is that financialconstraints operate both through debt and availability of internal funds,although the coefficients of internal funds are significant more often thanthose of external finance. A final observation is that the results are robust tothe alternative definitions of internal funds, that is, the use of cash flow orvalue added, as well as to the assumptions relating to a firm’s objectivefunction. This means that, while their magnitude and significance changesacross different specifications, their sign remains the same.12

The last step of the analysis is testing whether firms under differentownership structures have different objective functions. Given the non-nestednature of the competing models, the tests are carried out using Davidson andMacKinnon’s (1981) J-test for non-nested alternatives. The results of the testare reported in Table 5. The table should be read as follows. The cells incolumn ‘Dividend Model’ show the t-test of the significance of the fittedvalues from estimating equations assuming dividend per worker maximiza-tion added as an additional regressor in the equation derived from dividendmaximization. The cells in column ‘Dividend per Worker Model’ show the t-test of the significance of the fitted values from estimating equationsassuming dividend maximization added as an additional regressor in theequation derived from dividend per worker maximization. The test resultsshow that for state and manager-owned firms we are able to reject bothmodels. However, under alternative definitions of internal funds, we concludethat foreign and domestic outsider-owned firms behave consistently with theprofit (dividends) maximization hypothesis, while employee-owned firmsbehave consistently with dividends per worker maximization hypothesis.These conclusions provide support for the notion that all firms should not betreated as similar, nor should they be pooled in one sample.

CONCLUSIONS AND IMPLICATIONS

In this paper we have investigated whether investment spending of firms inEstonia is affected by liquidity constraints, as well as whether the degree of

12 Another robustness check we performed is to carry out estimation with the fixed effects

estimator. The results we obtained, which we do not report here due to space constraints, are

essentially similar to those obtained with the GMM estimator with respect to the sign and

significance of coefficients. These results are available from the authors upon request.


97


such constraints differs across firms under different governance structures.Our findings underline several important points. First, structural parameters,represented by the adjustment cost parameter, the optimal investment/capitalratio and the market power parameter, are significant determinants of a firm’sinvestment rates. Second, financial variables, used as a proxy for the extent ofliquidity constraints, play a significant role in a firm’s investment decisions.

Third, the degree of liquidity constraints varies with firm ownershipstructure. We consistently find that, on average, all domestically owned firmsface some liquidity constraints either through positive and significantcoefficients of internal fund variables or through negative and significantcoefficients of external fund variables. The behaviour of foreign-owned firms,however, is consistent with the Euler equation specification in the absence ofliquidity constraints. This suggests that foreign owners may have overcomeinitial obstacles from entry into an unknown market, such as cultural barriersor various information failures, compared with locals. Overall, the findingsprovide support for the hierarchy of finance arguments and are consistent

Table 5: Results of testing for the existence of different objective functions across ownership groupsusing the Davidson and Mackinnon J-test for non-nested models

Model ownership group With cash flow asmeasures of internal funds

With value added asmeasures of internal funds

Dividendmodel

Dividend perworker model

Dividendmodel

Dividend perworker model

State t=6.94*** t=11.56*** t=5.37*** t=10.55***(0.000) (0.000) (0.000) (0.000)

Foreign t=0.89 t=8.37*** t=1.04 t=11.21***(0.578) (0.000) (0.148) (0.000)

Domestic t=1.58 t=6.53*** t=0.68 t=6.19***(0.218) (0.000) (0.237) (0.000)

Manager t=8.12*** t=4.82*** t=8.45*** t=12.38***(0.000) (0.000) (0.000) (0.000)

Employee t=12.75*** t=1.27 t=10.18*** t=0.38(0.000) (0.528) (0.000) (0.682)

Notes: The table reports the results of testing whether firm behaviour across ownership groups is bettercharacterized by maximization of the discounted present value of total dividends or by maximization ofthe discounted present value of dividends per worker. The t-statistic corresponds to the fitted values ofthe alternative model added as an additional variable in the basic model, which is the one identified inthe respective column. Numbers in brackets are the respective P-values. A significant coefficient of thefitted values leads to the rejection of the respective basic model in favour of the alternative one.***significant at 1% significance level; **significant at 5% significance level; *significant at 10%significance level.


98


with the belief that successful restructuring in a transition economy isdependent on the availability of finance. Focusing on coefficient differencesacross groups, we find that the sensitivity of investment to the availability ofinternal and external finance is stronger for employee-owned firms, implyingthat motivational effects given by employee share ownership (Kruse andBlasi, 1997) do not fully mitigate the informational asymmetries and agencycosts with providers of capital. For the other groups of firms, somewhatsurprisingly, only domestic outsider-owned firms display sensitivity to bothmeasures of the availability of finance, with manager-owned firms beingsensitive to the availability of external finance, and state-owned firms beingsensitive to the availability of internal finance. The results for firms owned bydomestic outsiders imply that these firms could suffer from high levels ofmanagerial discretion and control.

Finally, we provide evidence that firm behaviour in a transition economycannot be analysed by invoking the representative firm approach. The resultsof Davidson’s and MacKinnon’s (1981) J-tests for non-nested alternatives leadto the rejection of the hypothesis that employee-owned firms can be modelledas profit maximizers. Curiously, the tests do not provide such a clearconclusion with respect to state and manager-owned firms, implying thattheir behaviour is consistent with both profit maximization and profit perworker maximization. The results imply that, because of firm heterogeneity,pooling all the firms in one sample for the purpose of the analysis wouldresult in mis-specification bias.

A continuous and lively debate in the transition literature is the efficiencyand viability of various ownership structures. The arguments in the debatecould be well summarized in Hansmann’s (1996) survivorship test, whichstates that if a given organizational form does not survive, then it must havebeen at a comparative disadvantage compared to other forms. One of theorganizational structures that, on various theoretical grounds, has beenpinpointed as inefficient, and, as such, subject to extinction, is employee-owned firms. The theoretical arguments have given rise to empirical workthat tries to assess the inefficiency of employee-owned firms. Estonia is one ofthe countries where employee ownership has been in decline. Kalmi (2002)makes a thorough analysis of the degeneration of these firms and finds thatstructural bias towards extinction13 and insufficient motives of incumbentinsiders to extend ownership to new employees are the main reasons thatdrive their decline. Our results emphasize the degree of liquidity constraintsas a further factor that potentially accentuates the decline of employee

13 This bias is caused by the property rights designation within the firm and the imperfection of

the market for shares.


99


ownership. Indeed, Kalmi’s (2002) and our sets of conclusions arecomplementary and provide the strongest evidence, yet, on the causes ofdegeneration in employee ownership. In addition, a major contribution of thispaper is that it provides robust evidence for the argument that employee-owned firms face more stringent liquidity constraints than other types offirms.

These results imply a role for public policy to increase the level ofinvestment by influencing the environment that firms operate in by providingfiscal incentives, developing capital markets and financial systems andimproving of access to capital. Fiscal incentives in the form of loweringcorporate taxes and/or exemption of retained earnings used for investmentfrom taxes (and thus paying taxes only on profits after investments) wouldstimulate investment through an increase in the availability of internal funds.Indeed, since 2000 retained earnings have been exempt from taxation inEstonia. It is expected that, in the long-run, this will result in higher capitalstock. For instance, Masso (2002), citing unpublished work conducted using amodel based on Tobin’s Q, states that the long-run effect of this policy is likelyto be an increase in capital stock of 6.1%. There is a possibility, however, thatsuch policies might produce undesirable effects. Under the conditions whenmanagers enjoy high degrees of discretion, an increase in the availability ofinternal finance simply puts more resources at their disposal to pursue theirown interests at the expense of those of the other shareholders. Insteadof relaxing the constraints, the outcome of this policy might then beoverinvestment. These potential costs, as well as the fact that the provisionof fiscal incentives depends on government budget constraints, imply alimited role for fiscal policies. Consequently, fiscal policies must be combinedwith other policies designed not only to relax liquidity constraints but also tomitigate agency conflicts within the firm by curbing managerial discretion.

One way to achieve both objectives is to follow policies to further developcapital markets and the financial sector, that is banking and non-bankinginstitutions. Estonia’s capital market, although growing, is small, and, assuch, its future will lie in alliances with other stock exchanges. The first stepin this direction was the creation of the pan-Baltic stock exchange in early2000, which was later integrated into the Nordic OMX and NASDAQ OMXgroup that is now the world’s largest stock exchange company. Subsequentmembership of Estonia in the European Union in 2004 has opened Europeancapital markets to Estonian companies. However, those likely to benefit fromthe stock market, at least in the short term, are large and listed firms. Moreimportant for Estonian firms in general is the development of the bankingsector and other non-banking institutions, such as investment funds, venturecapital funds, mutual funds and credit unions. The banking system in Estonia


100


is consolidated, well regulated and mostly foreign-owned. Over the period ofour analysis, as our results indicated, there was a general shortage of externalcapital. Yet, in the following years banks were heavily involved into providingfinance to both companies and households. With hindsight, the creditexpansion was faster than desirable, and the outcome was unsustainablecurrent account deficits, a housing bubble and an overheated housing andlabour markets. At the start of 2008 inflows of capital, both in the form offoreign direct investment and capital transfers from mainly Scandinavianparent banks, slowed substantially and Estonia’s economy suffered accord-ingly. The outcome of the crisis is that by the beginning of 2009 Estonia is in acredit crunch with bank financing being at a low level. This situation againrequires credit expansion in order to avoid strong liquidity constraints andunderinvestment. Similar steps need to be taken to increase the participationof non-banking institutions in financing the private sector, which until nowhas been marginal. A possible way would be to provide tax breaks to suchinstitutions that would be contingent to the amount of loans they extend toprivate companies, especially to those encountering difficulties in raisingfinance.

Finally, a faster way of injecting capital into firms is to promote the inflowof foreign direct investment either in the form of fully owned, foreignsubsidiaries, established through Greenfield investment or acquisition of anEstonian state or private-owned company, or partnerships with domesticcapital. The latter is of particular interests for Estonian private companies inneed of fresh funds for investment. Given that foreign owners have access toglobal capital markets, this would enable Estonian companies to gain accessto sources of funds that will have otherwise been either inaccessible or toocostly. Surveys of privatization processes across formerly centrally plannedeconomies underscore the importance of foreign ownership in speedy andeffective restructuring (Estrin et al., 2009).

REFERENCES

Aggarwal, R and Zong, S. 2006: The cash flow – Investment relationship: International evidence

of limited access to external finance. Journal of Multinational Financial Management 16:

89–104.

Alti, A. 2003: How sensitive is investment to cash flow when financing is frictionless? Journal of

Finance 58(2): 707–722.

Angrist, JD and Krueger, AB. 2001: Instrumental variables and the search for identification:

From supply and demand to natural experiments. Journal of Economic Perspectives 15(4):

69–85.

Arellano, M and Bond, SR. 1991: Some tests of specification for panel data: Monte Carlo evidence

and an application to employment equations. Review of Economic Studies 58(194): 277–297.


101


Bond, SR and Meghir, C. 1994: Dynamic investment models and the firm’s financial policy. Review of

Economic Studies 61(207): 197–222.

Cleary, S. 1999: The relationship between firm investment and financial status. The Journal of

Finance 54(2): 673–692.

Clementi, GL and Hopenhayn, HA. 2006: A theory of financing constraints and firm dynamics.

Quarterly Journal of Economics 121(1): 229–265.

Davidson, R and MacKinnon, JR. 1981: Several tests for model specification in the presence of

alternative hypotheses. Econometrica 49: 781–793.

Devereux, M and Schiantarelli, F. 1990: Investment, financial factors and cash flow: Evidence from

UK panel data. In: Hubbard, GR (eds). Asymmetric Information, Corporate Finance and

Investment. University of Chicago Press: Chicago, pp. 279–306.

Djankov, S. 1999: The restructuring of insider-dominated firms: A comparative analysis. Economics

of Transition 7(2): 467–479.

Dow, GK. 2003: Governing the firm: Workers’ control in theory and practice. Cambridge University

Press: New York.

Earle, J and Estrin, S. 1996: Employee ownership in transition. In: Frydman, R, Gray, CW and

Rapaczynski, A (eds). Corporate Governance in Central Europe and Russia Vol. 2, Central

European University Press: Budapest, pp. 1–62.

Estrin, S, Hanousek, J, Kocenda, E and Svejnar, J. 2009: Effects of privatization and ownership in

transition economies IPC working paper no. 30, International Policy Center, Gerald R. Ford School

of Public Policy, University of Michigan.

Fazzari, SM, Hubbard, RG and Petersen, BC. 1988: Financing constraints and corporate investment.

Brooking Papers on Economic Activity 1: 141–200.

Fazzari, SM, Hubbard, RG and Petersen, BC. 2000: Investment-cash flow sensitivities are useful:

A comment. Quarterly Journal of Economics 115(2): 695–705.

Filer, RK and Hanousek, J. 2002: Data watch: Research data from transition economies. Journal of

Economic Perspectives 16(1): 225–240.

Galeotti, M, Schiantarelli, F and Jaramillo, F. 1994: Investment decisions and the role of debt, liquid

assets and cash flow: Evidence from Italian panel data. Applied Financial Economics 4(2):

121–132.

Goergen, M and Renneboog, L. 2001: Investment policy, internal financing and ownership

concentration in the United Kingdom. Journal of Corporate Finance 7: 257–284.

Grosfeld, I and Hashi, I. 2007: Changes in ownership concentration in mass privatised firms:

Evidence from Poland and the Czech Republic. Corporate Governance an International Review 15:

520–534.

Hadlock, CJ. 1998: Ownership, liquidity and investment. RAND Journal of Economics 29(3):

487–508.

Hanazaki, M and Qun, L. 2007: Corporate governance and investment in East Asian firms –

Empirical analysis of family-controlled firms. Journal of Asian Economics 18(1): 76–97.

Hansmann, H. 1996: The ownership of enterprise. Belknap Press: Cambridge, MA.

Hennessy, CA, Levy, A and Whited, TM. 2007: Testing Q theory with financing frictions. Journal of

Financial Economics 83(3): 691–717.

Hoshi, T, Kashyap, A and Scharfstein, D. 1991: Corporate structure, liquidity and investment:

Evidence from Japanese industrial groups. Quarterly Journal of Economics 106(1): 33–60.

Hu, X and Schiantarelli, F. 1998: Investment and capital market imperfections: A switching

regression approach using US firm panel data. The Review of Economics and Statistics 80(3):

466–479.Hubbard, GR, Kashyap, A and Whited, TM. 1995: Internal finance and firm investment. Journal of

Money, Credit and Banking 27(3): 683–701.

Jones, DC, Kalmi, P and Mygind, N. 2005: Choice of ownership structure and firm performance:

Evidence from Estonia. Post Communist Economies 17(1): 83–107.


102


Jones, DC and Mygind, N. 1999: The nature and determinants of ownership changes after

privatization: Evidence from Estonia. Journal of Comparative Economics 27: 422–441.

Kalmi, P. 2002: On the (in)stability of employee ownership: Estonian evidence and lessons for

transition economies. PhD dissertation, Copenhagen Business School, PhD series 10.

Kaplan, SN and Zingales, L. 1997: Do investment-cash flow sensitivities provide useful measures

of financing constraints. Quarterly Journal of Economics 112(1): 169–215.

Kaplan, SN and Zingales, L. 2000: Investment-cash flow sensitivities are not valid measures

of financing constraints. Quarterly Journal of Economics 115(2): 707–712.

Kruse, DL and Blasi, JR. 1997: Employee ownership, employee attitudes and firm performance.

In: Lewin, D and Mitchell, DJB, Zaidi, MA (eds). The Human Resource Management Handbook,

Part 1. JAI Press: Greenwich, CT.

Masso, J. 2002: Financing constraints as determinants of the investment behaviour of Estonian

firms. Baltic Journal of Economics 3(1): 8–30.

Morck, R, Shleifer, A and Vishny, R. 1988: Management ownership and market valuation: An

empirical analysis. Journal of Financial Economics 20(1–2): 293–315.

Moyen, N. 2004: Investment-cash flow sensitivities: Constrained versus unconstrained firms.

Journal of Finance 59(5): 2061–2092.

Oehlert, GW. 1992: A note on the delta method. American Statistician 46: 27–29.

Oliner, SD and Rudebusch, GD. 1992: Sources of the financing hierarchy for business investment.

The Review of Economics and Statistics 74(4): 643–654.

Petersen, MA and Rajan, RG. 1994: The benefits of lending relationships: Evidence from small

business data. The Journal of Finance 59(1): 3–37.

Schaller, H. 1993: Asymmetric information, liquidity constraints and Canadian investment.

Canadian Journal of Economics 26(3): 552–574.

Shleifer, A and Vishny, RW. 1997: A survey of corporate governance. The Journal of Finance 52(3):

737–783.

Stein, JC. 2003: Agency, information and corporate investment. In: Constantinides, GM, Harris, M

and Stultz, RM (eds). Handbook of Economics and Finance Vol. 1, Elsevier North-Holland:

Amsterdam, pp. 111–166.

Vogt, SC. 1994: The cash flow investment relationship: Evidence from US manufacturing firms.

Financial Management 23(2): 3–20.

Ward, B. 1958: The firm in Illyria: Market syndicalism. American Economic Review 48(4): 566–589.

Whited, TM. 1992: Debt, liquidity constraints and corporate investments: Evidence from panel data.

The Journal of Finance 53(4): 1425–1460.


103


Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Documents

Corp Govern - Liquidity