Abstract
We uncover a positive relationship between firms' corporate governance quality, as measured by the degree of managerial entrenchment, and the quality of their real investment decisions. Firms whose managers are less entrenched invest more, invest more in line with their investment opportunities and have higher productivity of capital and labor. Rather than reducing overinvestment, our evidence suggests that good governance primarily mitigates underinvestment. These results are robust to alternative measures of investment opportunities and are not driven by product market competition or potential endogeneity between governance quality and investment opportunities.
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