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

Over the part two decades, a wide empirical literature has addressed the theme of firmtevel financial constraints, supporting the hypothesis that the availability of internal funds is indeed a major driver of investment decisions (Hímmeiberg and Petersen, 1994). The largest part of such empirical analyses is based on refinements of the original model by Fazzari, Hubbard and Petersen (1988) which derives the presente of liquidìty constraints from the observation of differentials in Investment-cash flow elastìcities among sub groups of companíes. However, the theoretical ride of the issue is stili debated. Following Iladlock (1998) and Degryse and de jong (2006), investment - cash flow sensitivities can be attributed to the presente of two different factors: asymmetric information on capital markets or internal agency problems leading to overinvestment by the management. In this paper, we try to disentangle the different potential determinante underlving the observed positive elasticity between investments and internal resources using a new sample of 1035 Italian manufacturing firms observed in the period 1998-2003. In order to analyse to what extent investment elasticity míght be related to agency problems, we account for both the ownership strutture 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 presente of an inverted - U relatìonship between concentration of ownership and the elasticity of investment to cashflow. The overall evidente, which includer analysis accounting for innovation effort and for the effect of industrial group membership, is supportive of the hypothesîs that the elevated dependance of investment in both tangible and intangible capital on internal resources cannot be fully attributed to frictions on the credit market.