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Investment and financing constraints in China: does working capital management make a difference?

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  • John Knight
  • Sai Ding and Alessandra Guariglia

Abstract

We use a panel of over 120,000 Chinese firms of different ownership types over the period 2000-2007 to analyze the linkages between investment in fixed and working capital and financing constraints.� We find that those firms characterized by high working capital display high sensitivities of investment in working capital to cash flow (WKS) and low sensitivities of investment in fixed capital to cash flow (FKS).� We then construct and analyze firm-level FKS and WKS measures and find that, despite severe external financing constraints, those firms with low FKS and high WKS exhibit the highest fixed investment rates.� This suggests that good working capital management may help firms to alleviate the effects of financing constraints on fixed investment.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 521.

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Date of creation: 01 Dec 2010
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Handle: RePEc:oxf:wpaper:521

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Keywords: Investment; cash flow; financing constraints; working capital;

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Citations

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Cited by:
  1. Ferrando, Annalisa & Marchica, Maria-Teresa & Mura, Roberto, 2014. "Financial flexibility across the euro area and the UK," Working Paper Series 1630, European Central Bank.
  2. Sai Ding & Alessandra Guariglia & John Knight, . "Does China overinvest? Evidence from a panel of Chinese firms," Discussion Papers 12/04, University of Nottingham, GEP.
  3. Kalina Manova & Zhihong Yu, 2012. "Firms and Credit Constraints along the Global Value Chain: Processing Trade in China," NBER Working Papers 18561, National Bureau of Economic Research, Inc.
  4. Malik, Zafar Ullah & Iqbal, Athar, 2012. "Affect of Working Capital Management on Firms Profitability in Sugar Industry of Pakistan," MPRA Paper 41436, University Library of Munich, Germany.
  5. Natasha Agarwal & Chris Milner & Alejandro Riaño, 2013. "Credit Constraints and FDI Spillovers in China," CESifo Working Paper Series 4313, CESifo Group Munich.
  6. Minjia Chen & Alessandra Guariglia, . "Financial constraints and firm productivity in China: do liquidity and export behavior make a difference?," Discussion Papers 11/09, University of Nottingham, GEP.
  7. Alessandra Guariglia & Paul Mizen, 2012. "Investment and Asset Growth of Asian Firms: Evidence for Financial Resilience in the Recent Financial Crisis," Working Papers 322012, Hong Kong Institute for Monetary Research.
  8. Chen, Minjia & Guariglia, Alessandra, 2013. "Internal financial constraints and firm productivity in China: Do liquidity and export behavior make a difference?," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1123-1140.

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