Management pay-performance sensitivity, internal cash flow and investment behavior: A test of the free cach flow theory and asymmetric information theory |
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Authors: | Xiaoqiang Zhi Pan Tong |
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Institution: | (1) School of Business, Renmin University of China, Beijing, 100872, China;(2) School of Accounting, Beijing Technology and Business University, Beijing, 100048, China |
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Abstract: | The relationship between investment and financing, the two basic components of corporate finance, is of significant interest
to researchers and practitioners alike. The free cash flow hypothesis and asymmetric information hypothesis are two important
theories to explain the relationship between investment expenditure and cash flow. In this paper, we examine how consistency
between the interests of management and shareholders influences investment-cash flow sensitivity, and how the nature of the
controlling shareholder influences this relationship, so as to analyze how much the free cash flow hypothesis and asymmetric
information hypothesis can explain the practice of investment and financing in China. We use pay-performance sensitivity as
a proxy for the degree of consistency between shareholders and management interests. We find that investment-cash flow sensitivity
is affected not only by financial constraints that caused by asymmetric information, but also by the shareholder-manager agency
problem. It is found that the asymmetric information theory has more explanatory power than the shareholder-manager agency
theory. In addition, the relationship between investment-cash flow sensitivity and pay-performance sensitivity is affected
by the nature of controlling shareholders. Specifically, in the state-owned enterprises, the investment-cash flow sensitivity
is mainly ascribed to information asymmetry problems, but in the non-state-owned enterprises, the investment-cash flow sensitivity
mainly results from free cash flow.
Translated and revised from Kuaiji Yanjiu 会计研究 (Accounting Research), 2007, (10): 73–81 |
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Keywords: | pay-performance sensitivity investment-cash flow free cash flow asymmetric information |
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