Investment and Internal Finance: Asymmetric Information or Managerial Discretion?
Hans Degryse, Abe de Jong
International Journal of Industrial Organization,
No. 1,
2006
Abstract
This paper examines the investment-cash flow sensitivity of publicly listed firms in The Netherlands. Investment-cash flow sensitivities can be attributed to overinvestment resulting from the abuse of managerial discretion, but also to underinvestment due to information problems. The Dutch corporate governance structure presents a number of distinctive features, in particular the limited influence of shareholders, the presence of large blockholders, and the importance of bank ties. We expect that in The Netherlands, the managerial discretion problem is more important than the asymmetric information problem. We use Tobin's Q to discriminate between firms with these problems, where LOW Q firms face the managerial discretion problem and HIGH Q firms the asymmetric information problem. As hypothesized, we find substantially larger investment-cash flow sensitivity for LOW Q firms. Moreover, specifically in the LOW Q sample, we find that firms with higher (bank) debt have lower investment-cash flow sensitivity. This finding shows that leverage, and particularly bank debt, is a key disciplinary mechanism which reduces the managerial discretion problem.
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The coalition treaty from a fiscal point of view
Kristina vanDeuverden
Wirtschaft im Wandel,
No. 12,
2005
Abstract
After weeks of negotiations the coalition finally agreed on the conditions for their political work. Not surprisingly, the coalition agreement is complex and intransparent – with a multitude of single measures far away from a precise definition. Quantifying the programme and estimating resulting cash flows is currently difficult; official calculations are – if at all – only partly available. Anyhow, the contract will form the basis for economic policy during the next four years; therefore its evaluation by now is indispensable. The thin red line of the agreement – not astonishingly when considering the precarious financial situation of the public sector – is consolidation. However, more than 80% of the consolidation volume results from the revenue side. Though one third of this is due to the cutback of tax exemptions, the lion’s share comes from raising tax rates, mainly the VAT standard rate. In contrast, cutting back public expenditure is minor and the agreement clearly comes short of the Koch/Steinbrück proposal; even new tax reliefs are created. The consolidation is almost completely borne by private households. Enterprises as a whole are barely hit. However, they have to wait until 2008 for a reform of company taxation – one of the most pressing problems in this legislative period. To reduce the companies tax burden until the reform starts the conditions for tax depreciation are temporarily relaxed. Anyway, from an international point of view the statutory tax rate is an important signal to enterprises deciding where to invest. Lowering effective tax rates by changing depreciation conditions is intransparent and, thus, will be less effective. Furthermore savings within the public sector are planned to accomplish consolidation; 10 billion Euro should result from efficiency gains and reduced expenditure. Consolidation measures mainly focus on the budget of the federal government. However, Länder and communities will participate in the additional tax revenues. In contrast, social securities will loose – and therefore also the share of employment that is subject to social insurance contribution. Particularly the unemployment insurance will be burdened by the decrease of its premium rate. Besides, the federal government will reduce its grants to the pension funds and most notably the health system. The contract is dominated by fiscal constraints. Cyclical requirements are considered only cursory and pressing structural reforms are put off. The reforms of company’s taxation, of fiscal federalism, of the health system as well as a proceeding reform of the labour market are only proposed. How and when measures in these fields are realised will determine whether fiscal policy can set a new course.
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Promotion of investment in East Germany - Results of an empirical study of effectiveness
Harald Lehmann, Andreas Stierwald
Wirtschaft im Wandel,
No. 5,
2004
Abstract
In Germany considerable amounts of public funds are being spent on business development programs. In order to do so economic reasoning is needed. In particular the programs for supporting investment lack microeconometric empirical evaluation. To close this gap the special program „Gemeinschaftsaufgabe zur Verbesserung der regionalen Wirtschaftsstruktur“ (GA) is exemplarily analyzed. This program is intended to strengthen the capital stock of the East German economy, so firms of the East German manufacturing industries will be studied. A comparison of the two fundamental methods for microeconometric evaluation shall demonstrate the general problems in analyzing the effectiveness of development programs. The matching estimator provides more stable results then a sample selectivity model. The results suggest that the GA generates considerable extra investment activities.
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Economic Development 2002 and 2003: Investments – The Achilles Heel of the Economy
Wirtschaft im Wandel,
No. 10,
2002
Abstract
The Article analyses and forecasts the economic developments for the World and German in 2002 and 2003. During the winter 2001/2002 the World Economy was able to pull out of its trough. Nonetheless, the upswing did not reach investments and was mainly driven by consumption and exports in the USA and the remaining major economies, respectively. In the course of this and next year Investors will gradually regain their trust in the economy. The same will be the case for consumers in Germany and Europe. As a result a modest recovery on a wide front will develop. In the course of next year this recovery will start to weaken. In Germany, Wage Policy has retracted from its former moderate stance. Hence, although due to the improving economic conditions and the resulting slowed employment cuts by the end of 2002 as well as employment increases in 2003, the upswing on the labour market will not reach the dynamics of the 1999/2000 recovery. Fiscal Policy, caused by the need to consolidate the public budget, will be restrictive. Despite the low inflation risks, by the end of this year the ECB will have raised its major interest rate by 1/2 percentage point. Nonetheless, as interest rates in real terms will remain at relatively low levels a restrictive impact from the Monetary Policy in Germany and the Euro Area will is not expected. The most important Data for the World Economy and Germany are being stated in detailed tables.
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Current Trends - Further erosion of public investment
Rüdiger Pohl
Wirtschaft im Wandel,
No. 6,
2002
Abstract
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Public Research Institutions in East Germany: a Promising Base for Economic Upturn?
Gerhard Heimpold, Martin T. W. Rosenfeld
Wirtschaft im Wandel,
No. 15,
2001
Abstract
In the 1990s a lot was done to strengthen public research efforts in East Germany. The main indicators relating to public research reflect an ambivalent picture. Investment by universities and public research institutions outside the universities reached a higher level than in West Germany. However, there remains an East-West gap with respect to the capital stock. The per capita stock of R&D staff in the university sector reached almost the level in the old Länder. With respect to the university R&D in engineering sciences, among those fields of university research which are particularly business-related, per capita stock of staff as well as per capita investment in the Eastern German Länder are above the West German level. In university natural science the East-West pattern of the R&D input factors mentioned is reversed. The receipts of the universities acquired from research contracts, which may be used as an indicator to assess the quality of public research, reveal shortcomings. These shortcomings, though these have been partly caused by the transitional situation in East Germany`s universities, where new institutions were built up only gradually. The R&D institutions outside the universities are obviously better equipped than such institutions in West Germany.
The visible advantages offered by public sector research institutions in East Germany might be used much more intensively to foster the economic reconstruction in East Germany. In parallel with this, the remaining shortcomings of public R&D in East Germany should be eliminated. If reductions in universities´ capacities (due, for instance, to a declining number of persons who have a university entrance qualification) seem to be inevitable, the consequences of such restrictions should be carefully reconsidered.
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Germany: Cyclical Improvement not Until the End of the Year
Wirtschaft im Wandel,
No. 12,
2001
Abstract
During the second quarter of 2001 German overall production stagnated. Weak global development muddied the economic prospects of firms and prevented them from rising their output and their investment activities. In 2001 gross national product will only increase by 1%; the number of unemployed will be higher than expected. Nevertheless, we advise against an increase in public expenditure that aims at stimulating the economy. Anyhow, growing public deficits, caused by cyclical movements, should be accepted. In order to increase employment labour market reforms become more urgent.
In East Germany, currently even a decline in gross national product cannot be excluded. After the first period of restructuring, which has been accompanied by structural problems, cyclical movements become more important. In addition, economic stagnation burdens labour markets. Nonetheless trying to stimulate the East German economy by government spending programmes does not seem to be a viable strategy. From the cyclical point of view they are not very efficient and concerning structural problems they are no solution.
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Economic Development in Saxony-Anhalt: empirical results and policy recommendations
Franz Barjak, Peter Franz, Gerhard Heimpold, Martin T. W. Rosenfeld
Wirtschaft im Wandel,
No. 3,
2001
Abstract
Though the basic economic problems are still of the same kind all over East Germany, partially considerable regional differences exist in respect to the conditions for further economic development. Therefore, detailed empirical analyses for the individual Länder and their sub-regions are necessary making economic policy recommendations. The following contribution deals with this task taking Saxony-Anhalt as an example.
A multitude of indicators is used to bring out the specific strengths and weaknesses of the economy of this state (Land) and its sub-regions. The outstanding strength of Saxony-Anhalt are the high private investment outlays which served to build a modern capital stock during the past ten years. Another fundamental strength of the Land are the universities and public research institutions. Besides these unambiguous strengths some ‘ambivalent’ growth factors exist which are characterized by strengths as well as by weaknesses. Such ‘ambivalent’ growth factors are the infrastructure and the situation of important sectors and branches of economic activity. The weaknesses of Saxony-Anhalt’s economic structure find expression especially in its low supply with human capital and entrepreneurial initiative as well as in the few research and development efforts of its firms.
The aforementioned strengths of the Land are reflected insufficiently in its economic output. Consequently some economic policy measures are proposed to bring about an improvement: Amongst other things Saxony-Anhalt should develop a clear idea of its economic development (Leitbild). Such a Leitbild could be related to the Land’s strengths or to the elimination of its major weaknesses. This also would facilitate a concentrated use of the different economic policy instruments. The latter shouldn’t only be concentrated on singular economic growth factors but also spatially, on the economically stronger sub-regions, as this can lead to larger growth effects for the entire Land. The good provision with public research institutions in Saxony-Anhalt should be used to bring about an improvement of the economic structure to a larger extent than until now. This could be done for example by means of a further strengthening of applied research vs. basic research, possibly via orienting the public research more towards the existing branches of economic activity. Finally, the Land should intensify its efforts to increase the entrepreneurial initiative in Saxony-Anhalt, e. g. by means of introducing courses in economics in its schools.
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Current account deficit, public debt and direct investment in reform countries
Thomas Meißner
Wirtschaft im Wandel,
No. 9,
1995
Abstract
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