Corporate governance, accounting information environment and investment-cash flow sensitivity. Issue 4 (1st October 2018) - Li, Ming
Abstract : Purpose: The purpose of this paper is to test the effects of antitakeover protection on investment-cash flow sensitivity and whether these effects are moderated by firms' accounting information environment and agency problems. Design/methodology/approach: To test the effects of agency problems, the authors use the passage of second-generation antitakeover laws as the testing ground, which is a pseudo-natural experiment that is widely used in the accounting, finance and economics literature (e.g.Armstrong et al., 2012 ;Bertrand and Mullainathan, 2003 ). Findings: The authors' analysis shows that investment-cash flow sensitivity is greater when managers are insulated from takeovers. The authors' results also demonstrate that the effects of the passage of antitakeover laws on investment-cash flow sensitivity are greater when firms' accounting information environment is poor, which is measured by fewer analysts following and higher analyst forecast dispersion. The authors also show that the effects of the passage of antitakeover laws on investment-cash flow sensitivity are greater when firms have severe agency problems, which are measured by more free cash flow. Originality/value: The authors' research extends the empirical accounting literature about the effects of corporate governance and accounting information environment on firms' operating and financial decisions.