Academic journal article Multinational Business Review

Internal Funds, Corporate Investment and Corporate Governance: International Evidence

Academic journal article Multinational Business Review

Internal Funds, Corporate Investment and Corporate Governance: International Evidence

Article excerpt

This paper investigates the relation between investment, financing and ownership structure in an environment characterized by the existence of different forms of corporate governance. The use of internal funds to finance fixed assets investment and the action of the corporate governance systems are fundamental to the financing of investments. The model is tested using the BACH database and other sources of information for Germany, France, Italy, the USA, Japan and Spain, over the period 1980-1995. Further, the potential impact of globalization and the ownership structure on investment in fixed assets are discussed.


Due to the capital markets and the way firms are run in such countries as France, Germany, Italy, Spain, Japan and other Anglo-Saxon countries, there is a growing conviction that institutional differences are becoming ever more diffuse and difficult to define. Nevertheless, evidence has been found of the influence of the growth in sales and cash-flow on the policy of a firm's investment in fixed assets. Also, varying sensitivity of the said variables have been found depending on the country or countries considered.

Moreover, the concept of the firm as the owner of resources puts the onus on the management to maximize value through minimizing capital costs. This exposition is appropriate for explaining the hierarchical ordering of resources from a lower -internal funds- to a higher -issuing shares and debt- cost when financing the firm's investment policy. However, after recent changes in business ownership structure, expositions have arisen which analyze, in greater detail, the conduct within a firm and the costs derived from its corporate governance -agency theory-.

In this line of thought, the search for a good system of governance capable of generating profits for the shareholder, and others stakeholders in the firm, takes on an ever more decisive role. Such a system should encourage the existence of sufficient security so that fund contributors can view the firm as an exemplary mechanism for assigning revenues to their ownership rights while, at the same time, strengthening their individual wealth.

From this perspective, the aim of this paper is to find a balanced interpretation of the possible relationships between investment decisions, the financing policy and the firm's system of governance, all tied to its ownership structure. Obviously, the firm is characterized by a set of contractual relations concerning its financing, its capital structure, ownership and management compensation, etc. Therefore, this gives rise to many conflicts which generate agency costs which must be avoided or minimized.

The remainder of the article is structured as follows: section two analyzes financial decisions with respect to the firm's investment policy, on the basis of the system of governance and the structure of ownership. Section three shows the data used from the BACH data-base, the statistical model developed and the empirical results obtained. Finally, section four sets out the conclusions.

Investment, Financing Decisions and Corporate Governance

The firm's investment behavior and its financial restrictions have been the subject of many analyses in recent years. The studies carried out up to now have basically concentrated on the aspects related to stocks investment, R+D and fixed assets. Attention has also been paid to price formation in markets with imperfect information, corporate culture concerning investment, fiscal policy, economic cycles and the effects of the monetary policy.

In this respect, taking information costs and the firm's debt rating as indicators, the way in which the fluctuations of internal funds caused a strong impact on investment in stocks in firms with qualified debt was studied (Carpenter, Fazzari and Petersen 1994). This reasoning served as the basis for showing how, in firms with no debt rating, the investment in stocks was not conditioned by changes in the market interest rates (Blinder and Maccini 1991), but by the availability of internal resources within the firm. …

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