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The authors study investigates the relationship between excess cash holdings and investment behavior, under both financial constraints and managerial entrenchment, based upon a sample of Taiwanese firms, which are in the environment characterized by poor legal protection for investors, with the data covering the years 2000 to 2006. They find that excess cash is significantly sensitive to both total investment and capital expenditure, particularly for firms with financially constrained and severe managerial entrenchment. However, the evidence shows that the problems of both underinvestment and overinvestment are found to have less distorting effect on the use of excess cash for R&D expenditure.
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