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Does China overinvest? Evidence from a panel of Chinese firms

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  • Sai Ding
  • Alessandra Guariglia
  • John Knight

Abstract

This paper uses a dataset of more than 100,000 firms over the period of 2000-07 to assess whether and why Chinese firms overinvest. We find that corporate investment in China has become increasingly efficient over time, which suggests that overinvestment has been declining. However, within all ownership categories, we find evidence indicating a degree of overinvestment by firms that invest more than the industry median. The free cash flow hypothesis provides a good explanation for China’s overinvestment in the collective and private sectors, whereas in the state sector, overinvestment is attributable to the poor screening and monitoring of enterprises by banks.

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Paper provided by University of Nottingham, GEP in its series Discussion Papers with number 12/04.

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Handle: RePEc:not:notgep:12/04

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Keywords: Overinvestment; Investment efficiency; Free cash flow; Leverage; China;

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Cited by:
  1. Il Houng Lee & Murtaza H. Syed & Liu Xueyan, 2012. "Is China Over-Investing and Does it Matter?," IMF Working Papers 12/277, International Monetary Fund.

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