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EMEMAR-00307; No of Pages 15
Emerging Markets Review xxx (2012) xxx–xxx

Contents lists available at SciVerse ScienceDirect

Emerging Markets Review journal homepage: www.elsevier.com/locate/emr

Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets
Bill Francis a, Iftekhar Hasan b,⁎, Liang Song c, 1, Maya Waisman d, 2 a Lally School of Management, Rensselaer Polytechnic Institute, 110, 8th Street, Troy, NY 12180-3590, United States Fordham University and Bank of Finland, 1790 Broadway, 11th Floor, New York, NY 10019, United States c Michigan Technological University, 1400 Townsend Drive Houghton, MI 49931, United States d Fordham University, 1790 Broadway, 13th Floor, New York, NY 10019, United States b a r t i c l e
Available online xxxx JEL classification: G20 G30 G31 G38

i n f o

a b s t r a c t
Controlling for country-level governance, we investigate how firms ' corporate governance influences financing constraints. Using firm-level corporate governance rankings across 14 emerging markets, we find that better corporate governance lowers the dependence of emerging market firms on internally generated cash flows, and reduces financing constraints that would otherwise distort efficient allocation of investment and destroy firm value. Additionally and more importantly, firm-level corporate governance matters more significantly in countries with weaker country-level governance. This suggests substitutability between firm-specific and country-level governance in determining a firm 's investment sensitivity to internal cash flows. © 2012 Elsevier B.V. All rights reserved.

Keywords: Corporate governance Emerging markets Investment–cash flow sensitivity

1. Introduction How firms make investment decisions in the face of financing constraints is one of the most fundamental questions in contemporary finance research (Almeida and Campello, 2007). This is the case because financing constraints can distort the efficient allocation of


References: Please cite this article as: Francis, B., et al., Corporate governance and investment-cash flow sensitivity: Evidence from..., Emerging Markets Review (2012), http://dx.doi.org/10.1016/j.ememar.2012.08.002 B. Francis et al. / Emerging Markets Review xxx (2012) xxx–xxx 15 Almeida, H., Campello, M., 2007. Financial constraints, asset tangibility, and corporate investment. Review of Financial Studies 20, 1429–1460. Almeida, H., Campello, M., Weisbach, M.S., 2004. The cash flow sensitivity of cash. Journal of Finance 59, 1777–1804. Alti, A., 2003. How sensitive is investment to cash flow when financing is frictionless? Journal of Finance 58, 707–722. Bae, K., Goyal, V.K., 2009. Creditor rights, enforcement, and bank loans. Journal of Finance 84, 823–860. Berkowitz, D., Pistor, K., Richard, J., 2003. Economic development, legality, and the transplant effect. European Economic Review 47, 165–195. Brown, J.R., Petersen, B.C., 2009. 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Djankov, S., La Porta, R., Lopez de Silanes, F., Shleifer, A., 2008. The law and economics of self-dealing. Journal of Financial Economics 88, 430–465. Doidge, C., Karolyi, G.A., Stulz, R.M., 2004. Why are foreign firms listed in the U.S. worth more? Journal of Financial Economics 71, 205–238. Doidge, C., Karolyi, G.A., Stulz, R.M., 2007. Why do countries matter so much for corporate governance? Journal of Financial Economics 86, 1–39. Durnev, A., Kim, E., 2005. To steal or not to steal: firm attributes, legal environment, and valuation. Journal of Finance 60, 1461–1493. Fazzari, S.M., Hubbard, R.G., Petersen, B.C., Blinder, A.S., Poterba, J.M., 1988. Financing constraints and corporate investment. Brookings Papers on Economic Activity 1, 141–206. Goergen, M., Renneboog, L., 2001. Investment policy, internal financing and ownership concentration in the UK. Journal of Corporate Finance 7, 257–284. Greenwald, B., Stiglitz, J.E., Weiss, A., 1984. 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