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Leverage and investment under a state-owned bank lending environment: Evidence from China

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  • Firth, Michael
  • Lin, Chen
  • Wong, Sonia M.L.
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Abstract

This study examines the relations between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks. We obtain three major findings. First, there is a negative relation between leverage and investment. Second, the negative relation between leverage and investment is weaker in firms with low growth opportunities and poor operating performance than in firms with high growth opportunities and good operating performance. Third, the negative relation between leverage and investment is weaker in firms with a higher level of state shareholding than in firms with a lower level of state shareholding. Overall, our results are consistent with the hypothesis that the state-owned banks in China impose fewer restrictions on the capital expenditures of low growth and poorly performing firms and also firms with greater state ownership. This creates an overinvestment bias in these firms.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 14 (2008)
Issue (Month): 5 (December)
Pages: 642-653

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Handle: RePEc:eee:corfin:v:14:y:2008:i:5:p:642-653

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Web page: http://www.elsevier.com/locate/jcorpfin

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Keywords: Capital structure Investment State ownership of banks and firms China;

References

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Citations

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Cited by:
  1. Sai Ding & Alessandra Guariglia & John Knight, 2010. "Negative investment in China: financing constraints and restructuring versus growth," Working Papers 2010_04, Durham University Business School.
  2. Liu, Chunyan & Uchida, Konari & Yang, Yufeng, 2014. "Controlling shareholder, split-share structure reform and cash dividend payments in China," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 339-357.
  3. Hirth, Stefan & Uhrig-Homburg, Marliese, 2010. "Investment timing, liquidity, and agency costs of debt," Journal of Corporate Finance, Elsevier, Elsevier, vol. 16(2), pages 243-258, April.
  4. Sai Ding & Alessandra Guariglia & John Knight, 2010. "Does China overinvest? Evidence from a panel of Chinese firms," Working Papers 2010_05, Durham University Business School.
  5. Michael Firth & Sonia Wong & Yong Yang, 2014. "The double-edged sword of CEO/chairperson duality in corporatized state-owned firms: evidence from top management turnover in China," Journal of Management and Governance, Springer, vol. 18(1), pages 207-244, February.
  6. Ciprian Stan & Mike Peng & Garry Bruton, 2014. "Slack and the performance of state-owned enterprises," Asia Pacific Journal of Management, Springer, vol. 31(2), pages 473-495, June.
  7. Sun, Jianjun & Yamori, Nobuyoshi, 2009. "Regional disparities and investment-cash flow sensitivity: Evidence from Chinese listed firms," MPRA Paper 14858, University Library of Munich, Germany.
  8. Huang, Ying Sophie & Wang, Yizhong, 2013. "Asset price, risk transfer and economic activities: Firm-level evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 663-676.
  9. Liu, Qigui & Tian, Gary, 2012. "Controlling shareholder, expropriations and firm's leverage decision: Evidence from Chinese Non-tradable share reform," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(4), pages 782-803.
  10. Jiang, Zhan & Kim, Kenneth A., 2013. "Financial management in China," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 23(3), pages 125-133.
  11. Lin, Chen & Lin, Ping & Zou, Hong, 2012. "Does property rights protection affect corporate risk management strategy? Intra- and cross-country evidence," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(2), pages 311-330.
  12. Firth, Michael & Malatesta, Paul H. & Xin, Qingquan & Xu, Liping, 2012. "Corporate investment, government control, and financing channels: Evidence from China's Listed Companies," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(3), pages 433-450.

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