Corporate governance and investment: domestic and foreign firms in Greece

Purpose-The purpose of this paper is to test the hypothesis that the nationality of ownership affects investment through its interaction with return expectations and cash flow and to answer the question whether this is due to asymmetric information or managerial discretion problems. Design/methodology/approach-Asymmetric information and managerial discretion hypothesis are being tested in a fully extended model, which provides for a variety of effects from the explanatory variables. The paper also uses firm and industry variables to account for the investment opportunities or marginal q instead of using the average Q. Using industrial variables instead of stock market data enables the possibility to extend the sample to cover a more representative sample of firms and especially a group of firms where financial constraints are expected to be more profound. Another aspect of the paper is that the ownership variable varies with the nationality of the shareholders of the firm and not with the shareholdings of the managers. This means that the paper restricts its search in two sub-samples, those of domestic firms and of foreign (multinational) ones. Findings-In total, 2,700 domestic and foreign (multinational) manufacturing firms located in Greece in the 1992-1997 period were examined, providing consistent evidence supporting the asymmetric information hypothesis against the managerial discretion hypothesis. These results also support the significance of ownership effects, at least with respect to the national origin of the firm's shareholders. Originality/value-This paper provides evidence that the nationality of ownership affects the investment behavior and is related with the specific information problems of the firms.