Managerial discretion and investment decisions of state-owned firms: Evidence from a panel of italian companies

WP 07/1998; In this paper we investigate the role of capital markets imperfections for the investment decisions of a panel of Italian manufacturing state-owned enterprises over the period 1977-1993. We explore whether asymmetric information and financing constraints or managerial discretion are the source of excess sensitivity of investment to cash flow. We estimate an accelerator model with additional cash flow terms and test for parameter constancy across soft and hard budget constraint periods as well as across the business cycle. We find that managerial discretion is responsible for the investment cash flow correlation, especially during the soft budget period. The evidence also suggests that the change in budget regime has an important impact on the investment decisions of this panel of public enterprises