Analysis of Cash Flow Sensitivity of Investment Dependence on the Ownership Structure

According to the Modigliani and Miller theory, <<in perfect and complete markets, investment decisions of a firm are independent from its financial situation>> (Modigliani and Miller, 1958). Firms should approve and undertake investment projects if the net present value of discounted cash flows is above zero (so, the discounted earnings exceed the capital expenditures). Moreover, there should be no capital rationing because companies theoretically can always obtain external financing at a cost equal to their cost of capital. However, the Modigliani/Miller assumptions become non-representative at imperfect markets, so other factors need to be taken into account. One of such factors that has an impact on corporate performance might be an ownership structure. In the context of ownership researchers usually compare two types of corporate owners - private and government stakeholders. Usually, government ownership is perceived as being less efficient, despite there is no clear evidence of such a fact. However, firms with different corporate governance seem to have different access or attitude to the disposable capital. This paper is dedicated to the examination of the reasons of such differences and the analysis of investment-cash flow sensitivity problem in Russia in the context of different corporate governance profiles.