Investment and Internal Finance: Asymmetric Information or Managerial Discretion?

This paper examines the relation between cash-flow availability and investment spending in The Netherlands. In particular we are interested whether manae for both firms with low and high investment opportunities. It is however significantly larger for firms with low investment opportunities, suggesting that the managerial-discretion problem is most important in the Dutch setting. Effective corporate-governance may reduce this agency problem. Specific to The Netherlands, firms with low shareholder influence posit a higher cash-flow investment sensitivity.The relavnce of asymmetric information is confirmed as smaller firms and firms from information-sensitive industries show a larger cash-flow investment sensitivity.