Corporate Investment and Cash Flow

The investment-cash flow sensitivity in different contexts of protection of investors' rights

We use a fine-grained approach to capture country-level property rights of suppliers of capital (i.e., minority shareholders and creditors). Our aim is to better delineate the multiple dimensions of the institutional capital domain. We find evidence for the effects of time changes and within-country differences on legal protections for suppliers of capital, which we label symmetric and asymmetric property rights. We show that these differences explain cross-country variations in firms' financing behaviors. Our results indicate that firms respond counter-intuitively to property rights strength: they rely more on internal funds for investment when shareholder and creditor protection are symmetrically strong, that is when capital supply is available and well protected. We offer relevant insights for comparative institutional analysis, as we show that the strength of property rights influence firms to look for alternative sources of capital to reduce risk and/or external control.

Co-authored with Luiz Kabbach de Castro, with Eduardo Schiehll and Paulo Terra.

Henrique Castro Martins
Henrique Castro Martins
Assistant Professor of Finance