IDEAS home Printed from https://ideas.repec.org/a/wly/mgtdec/v30y2009i2p91-108.html
   My bibliography  Save this article

Financial factors and company investment decisions in transitional China

Author

Listed:
  • Jia Liu

    (Salford Business School, The University of Salford, Greater Manchester, UK)

  • Dong Pang

    (The University of Manchester, Manchester, UK)

Abstract

We investigate the propensity of Chinese publicly listed firms to invest in response to financial factors, according to the a priori degree of a firm's information problems: industry sector, ownership structure and firm size. The firms in primary and tertiary industries are found to be liquidity-constrained in their investment decisions. The investment-cash flow sensitivity of the firms in secondary industry indicates that they lost privileged access to credit in the course of China's market transition. However, we find no evidence that financial liberalization resulted in an easing of financing constraints for small- and medium-sized firms. Our result indicates that agency problems, stemming from a state-controlling pyramidal ownership structure, are responsible for the misallocation of internal funds. The importance of bankruptcy and agency costs in relation to debt finance for certain types of borrowers reflects the transitional nature of the financial environment facing Chinese firms. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • Jia Liu & Dong Pang, 2009. "Financial factors and company investment decisions in transitional China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 91-108.
  • Handle: RePEc:wly:mgtdec:v:30:y:2009:i:2:p:91-108
    DOI: 10.1002/mde.1440
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1002/mde.1440
    File Function: Link to full text; subscription required
    Download Restriction: no

    File URL: https://libkey.io/10.1002/mde.1440?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Shleifer, Andrei, 1998. "State versus Private Ownership," Scholarly Articles 33077889, Harvard University Department of Economics.
    2. Simon Johnson, 2000. "Tunneling," American Economic Review, American Economic Association, vol. 90(2), pages 22-27, May.
    3. Jacques Mairesse & Bronwyn H. Hall & Benoît Mulkay, 1999. "Firm-Level Investment in France and the United States: An Exploration of What We Have Learned in Twenty Years," Annals of Economics and Statistics, GENES, issue 55-56, pages 27-67.
    4. Stephen Bond & Costas Meghir, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Oxford University Press, vol. 61(2), pages 197-222.
    5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    6. Laeven, Luc, 2002. "Financial constraints on investments and credit policy in Korea," Journal of Asian Economics, Elsevier, vol. 13(2), pages 251-269.
    7. Raghuram Rajan & Henri Servaes & Luigi Zingales, 2000. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(1), pages 35-80, February.
    8. R. Glenn Hubbard & Anil K. Kashyap & Toni M. Whited, 1993. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
    9. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    10. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
    11. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    12. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    13. Fabio Schiantarelli & Alessandro Sembenelli, 2000. "Form of Ownership and Financial Constraints:Panel Data Evidence From Flow of Funds and Investment Equations," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 27(2), pages 175-192, June.
    14. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
    15. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent‐Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December.
    16. J. Maurice Clark, 1917. "Business Acceleration and the Law of Demand: A Technical Factor in Economic Cycles," Journal of Political Economy, University of Chicago Press, vol. 25, pages 217-217.
    17. On‐Kit Tam, 1986. "Reform of China's Banking System," The World Economy, Wiley Blackwell, vol. 9(4), pages 427-440, December.
    18. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    19. Huang, Guihai & Song, Frank M., 2006. "The determinants of capital structure: Evidence from China," China Economic Review, Elsevier, vol. 17(1), pages 14-36.
    20. Stephen Bond & Julie Ann Elston & Jacques Mairesse & Benoît Mulkay, 2003. "Financial Factors and Investment in Belgium, France, Germany, and the United Kingdom: A Comparison Using Company Panel Data," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 153-165, February.
    21. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    22. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 33-60.
    23. Tian Zhu, 1999. "China'S Corporatization Drive: An Evaluation And Policy Implications," Contemporary Economic Policy, Western Economic Association International, vol. 17(4), pages 530-539, October.
    24. Andrei Shleifer, 1998. "State versus Private Ownership," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 133-150, Fall.
    25. Bean, Charles R, 1981. "An Econometric Model of Manufacturing Investment in the UK," Economic Journal, Royal Economic Society, vol. 91(361), pages 106-121, March.
    26. Wald, John K, 1999. "How Firm Characteristics Affect Capital Structure: An International Comparison," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(2), pages 161-187, Summer.
    27. Athey, Michael J. & Laumas, Prem S., 1994. "Internal funds and corporate investment in India," Journal of Development Economics, Elsevier, vol. 45(2), pages 287-303, December.
    28. Charles Goodhart & Xiaosong Zeng, 2006. "China's Banking Reform: Problems and Potential Solutions," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 4(3), pages 185-198.
    29. repec:adr:anecst:y:1999:i:55-56:p:02 is not listed on IDEAS
    30. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    31. Qi, Daqing & Wu, Woody & Zhang, Hua, 2000. "Shareholding structure and corporate performance of partially privatized firms: Evidence from listed Chinese companies," Pacific-Basin Finance Journal, Elsevier, vol. 8(5), pages 587-610, October.
    32. Guy S. Liu & Pei Sun, 2005. "The Class of Shareholdings and its Impacts on Corporate Performance: a case of state shareholding composition in Chinese public corporations," Corporate Governance: An International Review, Wiley Blackwell, vol. 13(1), pages 46-59, January.
    33. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    34. Sun, Laixiang, 1998. "Estimating Investment Functions Based on Cointegration: The Case of China," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 175-191, March.
    35. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1998. "Financing Constraints And Inventory Investment: A Comparative Study With High-Frequency Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 513-519, November.
    36. John K. Wald, 1999. "How Firm Characteristics Affect Capital Structure: An International Comparison," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(2), pages 161-187, June.
    37. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Huang, Hsu-Huei, 2019. "Audit committees and systematic risk: Evidence from Taiwan’s regulatory change," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 477-491.
    2. Bialowolski, Piotr & Weziak-Bialowolska, Dorota, 2014. "External factors affecting investment decisions of companies," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-21.
    3. Liu, Jia & Wu, Yuliang & Ye, Qing & Zhang, Dayong, 2019. "Do seasoned offerings improve the performance of issuing firms? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 62(C), pages 104-123.
    4. Ameer, Rashid, 2014. "Financial constraints and corporate investment in Asian countries," Journal of Asian Economics, Elsevier, vol. 33(C), pages 44-55.
    5. Im, Hyun Joong & Liu, Jia & Park, Young Joon, 2021. "Policy uncertainty and peer effects: Evidence from corporate investment in China," International Review of Financial Analysis, Elsevier, vol. 77(C).
    6. Yu, Lean & Zha, Rui & Stafylas, Dimitrios & He, Kaijian & Liu, Jia, 2020. "Dependences and volatility spillovers between the oil and stock markets: New evidence from the copula and VAR-BEKK-GARCH models," International Review of Financial Analysis, Elsevier, vol. 68(C).
    7. Min Bai, 2022. "Rollover restrictions and the maturity mismatch between investment and enterprise financing," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(8), pages 3286-3300, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martinsson, Gustav, 2009. "Finance and R&D Investments - is there a debt overhang effect on R&D investments?," Working Paper Series in Economics and Institutions of Innovation 174, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    2. Günay, Hüseyin & Kılınç, Mustafa, 2015. "Credit market imperfections and business cycle asymmetries in Turkey," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 79-98.
    3. Paul Mizen & Cihan Yalcin, 2006. "Monetary Policy, Corporate Financial Composition and Real Activity," CESifo Economic Studies, CESifo, vol. 52(1), pages 177-213, March.
    4. Jean-Bernard Chatelain, 2003. "Structural modelling of financial constraints on investment: where do we stand?," Chapters, in: Paul Butzen & Catherine Fuss (ed.), Firms’ Investment and Finance Decisions, chapter 2, pages 40-58, Edward Elgar Publishing.
    5. Valentina Peruzzi, 2017. "Does family ownership structure affect investment-cash flow sensitivity? Evidence from Italian SMEs," Applied Economics, Taylor & Francis Journals, vol. 49(43), pages 4378-4393, September.
    6. Liu, Jia, 2013. "Fixed investment, liquidity, and access to capital markets: New evidence," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 189-201.
    7. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    8. Chen, Alex A. & Cao, Hong & Zhang, Dayong & Dickinson, David G., 2013. "The impact of shareholding structure on firm investment: Evidence from Chinese listed companies," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 85-100.
    9. Hönig, Anja, 2012. "Financing Constraints Revisited - Is there a Role for Taxation and Internal Funds?," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 66053, Verein für Socialpolitik / German Economic Association.
    10. Jaewoon Koo & Sunwoo Shin, 2004. "Financial Liberalization and Corporate Investments: Evidence from Korean Firm Data," Asian Economic Journal, East Asian Economic Association, vol. 18(3), pages 277-292, September.
    11. Laeven, Luc, 2000. "Does financial liberalization relax financing constraints on firms ?," Policy Research Working Paper Series 2467, The World Bank.
    12. Fabio Bertoni & María Ferrer & José Martí, 2013. "The different roles played by venture capital and private equity investors on the investment activity of their portfolio firms," Small Business Economics, Springer, vol. 40(3), pages 607-633, April.
    13. Lee, Sanghoon, 2015. "Slack and innovation: Investigating the relationship in Korea," Journal of Business Research, Elsevier, vol. 68(9), pages 1895-1905.
    14. Ann E. Harrison & Inessa Love & Margaret S. McMillan, 2022. "Global capital flows and financing constraints," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 8, pages 181-213, World Scientific Publishing Co. Pte. Ltd..
    15. Carpenter, Robert E. & Guariglia, Alessandra, 2008. "Cash flow, investment, and investment opportunities: New tests using UK panel data," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1894-1906, September.
    16. Fabio Schiantarelli & Alessandro Sembenelli, 2000. "Form of Ownership and Financial Constraints:Panel Data Evidence From Flow of Funds and Investment Equations," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 27(2), pages 175-192, June.
    17. Jaewoon Koo & Kyunghee Maeng, 2006. "Foreign ownership and investment: evidence from Korea," Applied Economics, Taylor & Francis Journals, vol. 38(20), pages 2405-2414.
    18. Francesco Crespi & Giuseppe Scellato, 2010. "Ownership Structure, Internal Financing And Investment Dynamics," Manchester School, University of Manchester, vol. 78(3), pages 242-258, June.
    19. Koo, Jaewoon & Maeng, Kyunghee, 2005. "The effect of financial liberalization on firms' investments in Korea," Journal of Asian Economics, Elsevier, vol. 16(2), pages 281-297, April.
    20. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:mgtdec:v:30:y:2009:i:2:p:91-108. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www3.interscience.wiley.com/cgi-bin/jhome/7976 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.