Increasingly Marginal Utilities: Diversification and Free Cash Flow in Newly Privatized UK Utilities

Increasingly Marginal Utilities: Diversification and Free Cash Flow in Newly Privatized UK Utilities This article was the experience of the newly privatized UK utilities as a unique natural experiment to explore aspects of the life cycle/free cash-flow hypothesis of Dennis Mueller and Michael Jensen. It demonstrates that in their immediate post-privatization, regulated environment the UK utilities experienced severe attenuation of all the principal forms of corporate governance, while remaining substantial cash generators but with limited scope for core business growth. It shows that the firms responded with a rapid – and apparently unsuccessful – expansion of non-core activities. The article then uses a two-way random effects panel design and finds substantial and robust support for the maintained hypothesis that (lagged) cash-flow drove diversification. The results also generate clear implications for privatization policy. In particular, they suggest that the incentive benefits anticipated from substituting private for government ownership may become distorted if the managements of newly privatized enterprises are sheltered from the regular disciplines of corporate governance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Increasingly Marginal Utilities: Diversification and Free Cash Flow in Newly Privatized UK Utilities

Loading next page...
 
/lp/springer_journal/increasingly-marginal-utilities-diversification-and-free-cash-flow-in-GtShuzNpnU
Publisher
Kluwer Academic Publishers
Copyright
Copyright © 1999 by Kluwer Academic Publishers
Subject
Economics; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1023/A:1007748909146
Publisher site
See Article on Publisher Site

Abstract

This article was the experience of the newly privatized UK utilities as a unique natural experiment to explore aspects of the life cycle/free cash-flow hypothesis of Dennis Mueller and Michael Jensen. It demonstrates that in their immediate post-privatization, regulated environment the UK utilities experienced severe attenuation of all the principal forms of corporate governance, while remaining substantial cash generators but with limited scope for core business growth. It shows that the firms responded with a rapid – and apparently unsuccessful – expansion of non-core activities. The article then uses a two-way random effects panel design and finds substantial and robust support for the maintained hypothesis that (lagged) cash-flow drove diversification. The results also generate clear implications for privatization policy. In particular, they suggest that the incentive benefits anticipated from substituting private for government ownership may become distorted if the managements of newly privatized enterprises are sheltered from the regular disciplines of corporate governance.

Journal

Review of Industrial OrganizationSpringer Journals

Published: Oct 15, 2004

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create lists to
organize your research

Export lists, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off