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

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  • Sai Ding
  • Alessandra Guariglia
  • John Knight

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.

Suggested Citation

  • Sai Ding & Alessandra Guariglia & John Knight, 2010. "Investment and financing constraints in China: does working capital management make a difference?," Working Papers 2010_33, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2010_33
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    Cited by:

    1. Ariu, Andrea, 2016. "Crisis-proof services: Why trade in services did not suffer during the 2008–2009 collapse," Journal of International Economics, Elsevier, pages 138-149.
    2. Yano, Go & Shiraishi, Maho, 2015. "Trade credit and ethnicity: Case of ethnic minority area in China," China Economic Review, Elsevier, vol. 36(C), pages 236-260.
    3. 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, pages 1123-1140.
    4. Natasha Agarwal & Chris Milner & Alejandro Riaño, "undated". "Credit Constraints and FDI Spillovers in China," Discussion Papers 11/21, University of Nottingham, GEP.
    5. Cheng, Dong & Hu, Zhongzhong & Tan, Yong, 2017. "Time-Varying Impacts of Financial Credits on Firm Exports: Evidence from Trade Deregulation in China," MPRA Paper 80657, University Library of Munich, Germany.
    6. 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.
    7. Manova, Kalina & Yu, Zhihong, 2016. "How firms export: Processing vs. ordinary trade with financial frictions," Journal of International Economics, Elsevier, pages 120-137.
    8. Guariglia, Alessandra & Liu, Pei, 2014. "To what extent do financing constraints affect Chinese firms' innovation activities?," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 223-240.
    9. Prayagsing Chakeel Coomar & Jankee Kheswar, 2016. "Internal Financial Markets and Corporate Investment Strategies in Africa — A Case Study of Mauritius," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 8(1), pages 007-020, June.
    10. Sai Ding & Alessandra Guariglia & John Knight, "undated". "Does China overinvest? Evidence from a panel of Chinese firms," Discussion Papers 12/04, University of Nottingham, GEP.
    11. Ben-Nasr, Hamdi, 2016. "State and foreign ownership and the value of working capital management," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 217-240.
    12. Amess, Kevin & Banerji, Sanjay & Lampousis, Athanasios, 2015. "Corporate cash holdings: Causes and consequences," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 421-433.
    13. Ameer, Rashid, 2014. "Financial constraints and corporate investment in Asian countries," Journal of Asian Economics, Elsevier, pages 44-55.
    14. 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.
    15. Ferrando, Annalisa & Marchica, Maria-Teresa & Mura, Roberto, 2014. "Financial flexibility across the euro area and the UK," Working Paper Series 1630, European Central Bank.
    16. repec:gam:jsusta:v:9:y:2017:i:10:p:1766-:d:113696 is not listed on IDEAS
    17. repec:eee:corfin:v:45:y:2017:i:c:p:203-219 is not listed on IDEAS
    18. Andrea Ariu, 2015. "Crisis-proof services : Why trade in services did not suffer during the 2008-2009 collapse," Working Paper Research 284, National Bank of Belgium.
    19. Minjia Chen & Alessandra Guariglia, "undated". "Financial constraints and firm productivity in China: do liquidity and export behavior make a difference?," Discussion Papers 11/09, University of Nottingham, GEP.
    20. repec:eee:ecosys:v:41:y:2017:i:2:p:179-202 is not listed on IDEAS
    21. Klepsch, Catharina & Elsas, Ralf, 2016. "How and when do firms adjust their investments toward targets?," Annual Conference 2016 (Augsburg): Demographic Change 145486, Verein für Socialpolitik / German Economic Association.
    22. Ariu, Andrea, 2016. "Crisis-proof services: Why trade in services did not suffer during the 2008–2009 collapse," Journal of International Economics, Elsevier, pages 138-149.
    23. Dong, Yan & Liu, Zhentao & Shen, Zhe & Sun, Qian, 2016. "Does State Ownership Really Matter in Determining Access to Bank Loans? Evidence from China's Partial Privatization," Pacific-Basin Finance Journal, Elsevier, pages 73-85.
    24. Andrea Fracasso, 2015. "Economic Rebalancing and Growth: the Japanese experience and China’s prospects," DEM Discussion Papers 2015/07, Department of Economics and Management.

    More about this item

    Keywords

    Investment; Cash flow; Financing constraints; Working capital;

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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