The Heterogeneous Effects of Corporate Governance on the Investment-Cash Flow Sensitivity -- Over- or Under-Investment Depending on Net Debt Status --

Using a large sample of the Japanese listed firms in the latter half of the 2000s, we investigate the heterogeneous effects of corporate governance on investment cash-flow sensitivity. We estimate a log-linear q-type investment equation incorporating cash flow effects, splitting the sample by net debt status and find the following: 1) The succession of managerial power has a significantly positive effect on the investment-cash flow sensitivity which may lead to overinvestment, 2) The magnitude of the effect is basically larger with the lower value of net debt status, 3) However, the effect disappears and instead the amount of gross debt comes to have a significantly negative effect on investment when the level of net debt is negative but not far from zero. In the last case, the strong motivation to keep the status of negative net debt, which arises from the same agency problem as the first two cases, may lead to underinvestment.