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Does China overinvest? Evidence from a panel of Chinese firms

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  • John Knight
  • Sai Ding and Alessandra Guariglia

Abstract

This paper addresses the hotly-debated question: do Chinese firms overinvest?� A firm-level dataset of 100,000 firms over the period of 2000-07 is employed for this purpose.� We initially calculate measures of investment efficiency, which is typically negatively associated with overinvestment.� Despite wide disparities across various ownership groups, industries and regions, we find that corporate investment in China has become increasingly efficient over time.� However, based on direct measures of overinvestment that we subsequently calculate, we find evidence of overinvestment for all types of firms, even in the most efficient and most profitable private sector.� We find that the free cash flow hypothesis provides a good explanation for China's overinvestment, especially for the private sector, while in the sector, overinvestment is attributable to the poor screening and monitoring of enterprises by banks.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 520.

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Date of creation: 01 Dec 2010
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Handle: RePEc:oxf:wpaper:520

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Keywords: Overinvestment; investment inefficiency; free cash flow; debt; 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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