Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets |
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| Affiliation: | 1. Department of Accounting, Robert J. Manning School of Business, University of Massachusetts Lowell, 1 University Avenue, Lowell, MA 01854, United States;2. Department of Accounting, School of Business, Virginia Commonwealth University, Snead Hall, 301 W. Main Street, Richmond, VA 23284, United States;1. Department of Business Administration, University of Brawijaya, Veteran Rd, Malang, East Java Province, Indonesia;2. Department of Banking and Finance, Chinese Culture University, No. 55, Hwa-Kang Road, Yang-Ming-Shan, Taipei 11114, Taiwan, ROC;3. Department of Business Administration, National Central University, No. 300, Jhongda Rd., Jhongli, Taoyuan 32001, Taiwan, ROC |
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| Abstract: | Controlling for country-level governance, we investigate how firms' corporate governance influences financing constraints. Using firm-level corporate governance rankings across 14 emerging markets, we find that better corporate governance lowers the dependence of emerging market firms on internally generated cash flows, and reduces financing constraints that would otherwise distort efficient allocation of investment and destroy firm value. Additionally and more importantly, firm-level corporate governance matters more significantly in countries with weaker country-level governance. This suggests substitutability between firm-specific and country-level governance in determining a firm's investment sensitivity to internal cash flows. |
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