Russian governance and investment

Abstract

Research on firm’s investment behaviour is central to corporate finance. Investment policy can be explained by many corporate finance theories involving the choice of financing (debt vs. equity vs. internal funds), agency costs (management vs. monitoring blockholders), asymmetric information (between management and providers of external finance) and moral hazard (the choice of level of risk of an investment project). Research on governance focuses on whether internal and external governance mechanisms improve firm value and profitability, and shareholder wealth. This focus on profits and returns continues to dominate the management literature, despite the widespread recognition that investment behaviour is at the basis of firm growth and productivity and contributes largely to shareholder value. Studying investment behaviour allows assessment of whether the controlling owners are re-investing their gains in long-term assets or taking them out as cash or dividends. These alternatives have drastically different implications for firm productivity growth and the dynamism of the economy. This thesis addresses this issue and investigates the question of how governance influences investment behaviour. I argue that investment depends not only on individual governance mechanisms but also on a combination of these mechanisms. In order to test and provide evidence supporting this argument, this thesis contains three essays that consider the effects on corporate investment behaviour of transparency and disclosure (TD), ownership networks, blockholders and board composition, and studies the effects of substitutability or complementarity between these governance mechanisms. The Russian context serves as an appropriate setting to examine these effects since governance plays a bigger role in this emerging economy than in a developed economy.