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Title:Does a switch of budget regimes constrain managerial discretion? Evidence for Italian public enterprises investment PDF Logo
Authors:Bertero, Elisabetta
Rondi, Laura
Issue Date:2002
Series/Report no.:WIDER Discussion Papers // World Institute for Development Economics (UNU-WIDER) 2002/29
Abstract:This study examines the effect of the hardening of the budget constraint on the investment behaviour of Italian state owned enterprises (SOEs). It carries out a natural experiment that exploits the 1987 shift of budget regimes due to the pressure of European Union economic policies on the Italian government. Drawing from the theory of capital market imperfections, we apply the empirical framework for the analysis of investment-cash flow sensitivity to a panel of state-owned manufacturing firms during the period 1977-93. We parallel state firms to Anglo-Saxon public corporations which, under separation of ownership and control, are afflicted by agency problems, managerial discretion, misallocation of free cash-flow and overinvestment. We argue that, under a soft budget constraint, state firms’ managerial discretion and, in particular, collusion between managers and vote-seeking politicians, lead to wasteful investment.
Subjects:capital markets imperfections
public enterprises
investment and cash flow
soft-budget constraint
managerial discretion
Italian firms
Document Type:Working Paper
Appears in Collections:WIDER Discussion Papers, United Nations University (UNU)

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