A revealed performance approach to understanding corporate governance problems
Subtitle: evidence from Canada
By: Robert S. Chirinko and Huntley Schaller
Contributors: Schaller, Huntley; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 02-46; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 02-46.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2002
Place of publication: Cambridge, MA
Language: eng
Number of pages: 46
Description: By studying the gap between the discount rates used by executives and shareholders, we assess the extent to which governance problems distort firm behavior. The estimation strategy recovers discount rates used by executives from the pattern of their actual investment spending. Our empirical work is based on panel data for 193 Canadian firms. For the firms most likely to be affected by Free Cash Flow agency problems, investment behavior appears to be guided by discount rates that are less than the market rate by 350-400 basis points. This wedge is reduced for firms with a concentrated ownership structure. Firms in our sample facing Free Cash Flow problems have a stock of fixed capital approximately 7 per cent to 22 per cent higher than would prevail under value maximizing behavior. Keywords: Corporate Governance, Business Investment, Discount Rates. JEL Classification: G3, E2.
Notes: "November 2002."

Includes bibliographical references (p. 26-30).

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