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Does the stock market affect investment by Chinese firms? Some new evidence

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  • Feng Xiao

Abstract

During the 1990s, the Chinese government increasingly relied on the stock market as the major tool for state-owned enterprise (SOE) reform and for the allocation of investment resources. This paper investigates the impact of stock market development in China on firm-level capital investment by using a panel data set constructed by the author of all Chinese listed firms for the period 1992 to 1999. The results show that stock market valuation, as measured by Tobin's q, has a highly independent, significant and positive influence on listed firms' investment decisions, particularly during the stock market boom from 1996 to 1999. Given the sizable real effects of the stock market, deviations of stock prices from fundamentals can have substantially negative consequences. As a result, this study suggests that sensible regulation of the Chinese stock market is needed in order to enhance the efficiency of stock prices and facilitate an effective channeling of investment funds.

Suggested Citation

  • Feng Xiao, 2009. "Does the stock market affect investment by Chinese firms? Some new evidence," International Review of Applied Economics, Taylor & Francis Journals, vol. 23(2), pages 197-213.
  • Handle: RePEc:taf:irapec:v:23:y:2009:i:2:p:197-213
    DOI: 10.1080/02692170802700542
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    References listed on IDEAS

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    1. Levine, Ross & Zervos, Sara, 1996. "Stock Market Development and Long-Run Growth," World Bank Economic Review, World Bank Group, vol. 10(2), pages 323-339, May.
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    Cited by:

    1. Ghassan Omet, 2011. "Stock Market Liquidity: Comparative Analysis of The Abu Dhabi Stock Exchange and Dubai Financial Market," Working Papers 655, Economic Research Forum, revised 12 Jan 2011.

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