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Does China overinvest? Evidence from a panel of Chinese firms

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  • Sai Ding
  • John Knight
  • Xiao Zhang

Abstract

This paper uses a dataset of more than 100,000 firms over the period of 2000–2007 to assess whether and why Chinese firms overinvest. We find that corporate investment is more efficient in the non-state sector. Within all ownership categories, we uncover evidence indicating a degree of overinvestment among firms that invest more than their industry median or more than their predicted optimal investment. The free cash flow hypothesis provides a good explanation for China’s overinvestment in the non-state sectors, whereas in the state sector, overinvestment is attributable to the poor screening and monitoring of enterprises by banks.

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  • Sai Ding & John Knight & Xiao Zhang, 2019. "Does China overinvest? Evidence from a panel of Chinese firms," The European Journal of Finance, Taylor & Francis Journals, vol. 25(6), pages 489-507, April.
  • Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:489-507
    DOI: 10.1080/1351847X.2016.1211546
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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • 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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