Corporate governance, accounting information environment and investment-cash flow sensitivity
International Journal of Accounting & Information Management
ISSN: 1834-7649
Article publication date: 1 October 2018
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.
Keywords
Acknowledgements
This study was started as a chapter of Dr Liang Song’s dissertation at Rensselaer Polytechnic Institute. This research acknowledges the support by Humanity and Social Science Youth foundation of Ministry of Education of China (Project NO: 15YJC630060) and “Corporation Society Responsibility” Academic Research Team of Wuhan Technology and Business University (XSTD2016001).
Citation
Li, M. and Song, L. (2018), "Corporate governance, accounting information environment and investment-cash flow sensitivity", International Journal of Accounting & Information Management, Vol. 26 No. 4, pp. 492-507. https://doi.org/10.1108/IJAIM-04-2017-0049
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited