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A balancing act: Managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market

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  • Guariglia, Alessandra
  • Yang, Junhong

Abstract

Using a large panel of Chinese listed firms over the period 1998–2014, we document strong evidence of investment inefficiency, which we explain through a combination of financing constraints and agency problems. Specifically, we argue that firms with cash flow below (above) their optimal level tend to under- (over-)invest as a consequence of financial constraints (agency costs). Furthermore, focusing on under-investing firms, we highlight that the sensitivities of abnormal investment to free cash flow rise with traditionally used measures of financing constraints, while for over-investing firms, the sensitivities increase with a wide range of firm-specific measures of agency costs.

Suggested Citation

  • Guariglia, Alessandra & Yang, Junhong, 2016. "A balancing act: Managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 111-130.
  • Handle: RePEc:eee:corfin:v:36:y:2016:i:c:p:111-130
    DOI: 10.1016/j.jcorpfin.2015.10.006
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    7. Robert Alexander & Rui-cong Sang & Sajid Anwar, 2016. "Regional Policy and Industrial Relocation in China: A Panel Data Analysis," EcoMod2016 9277, EcoMod.

    More about this item

    Keywords

    Under-investment; Over-investment; Free cash flow; Financial constraints; Agency costs; China;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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