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Financial factors and company investment decisions in transitional China

Author

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  • Jia Liu

    (Salford Business School, The University of Salford, Greater Manchester, UK)

  • Dong Pang

    (The University of Manchester, Manchester, UK)

Abstract

We investigate the propensity of Chinese publicly listed firms to invest in response to financial factors, according to the a priori degree of a firm's information problems: industry sector, ownership structure and firm size. The firms in primary and tertiary industries are found to be liquidity-constrained in their investment decisions. The investment-cash flow sensitivity of the firms in secondary industry indicates that they lost privileged access to credit in the course of China's market transition. However, we find no evidence that financial liberalization resulted in an easing of financing constraints for small- and medium-sized firms. Our result indicates that agency problems, stemming from a state-controlling pyramidal ownership structure, are responsible for the misallocation of internal funds. The importance of bankruptcy and agency costs in relation to debt finance for certain types of borrowers reflects the transitional nature of the financial environment facing Chinese firms. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • Jia Liu & Dong Pang, 2009. "Financial factors and company investment decisions in transitional China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 91-108.
  • Handle: RePEc:wly:mgtdec:v:30:y:2009:i:2:p:91-108
    DOI: 10.1002/mde.1440
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    File URL: http://hdl.handle.net/10.1002/mde.1440
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    References listed on IDEAS

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    Cited by:

    1. Hsu-Huei Huang & Min-Lee Chan & Chih-Hsiang Chang & Jing-Ling Wong, 2012. "Is Corporate Governance Related to the Conservatism in Management Earnings Forecasts?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 105-121, July.
    2. Ameer, Rashid, 2014. "Financial constraints and corporate investment in Asian countries," Journal of Asian Economics, Elsevier, vol. 33(C), pages 44-55.
    3. Hsu-Huei Huang & Min-Lee Chan & Chih-Hsiang Chang & Jing-Ling Wong, 2012. "Is Corporate Governance Related to the Conservatism in Management Earnings Forecasts?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 105-121, July.

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