IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Does China overinvest? Evidence from a panel of Chinese firms

  • John Knight
  • Sai Ding and Alessandra Guariglia

This paper addresses the hotly-debated question: do Chinese firms overinvest?� A firm-level dataset of 100,000 firms over the period of 2000-07 is employed for this purpose.� We initially calculate measures of investment efficiency, which is typically negatively associated with overinvestment.� Despite wide disparities across various ownership groups, industries and regions, we find that corporate investment in China has become increasingly efficient over time.� However, based on direct measures of overinvestment that we subsequently calculate, we find evidence of overinvestment for all types of firms, even in the most efficient and most profitable private sector.� We find that the free cash flow hypothesis provides a good explanation for China's overinvestment, especially for the private sector, while in the sector, overinvestment is attributable to the poor screening and monitoring of enterprises by banks.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper520.pdf
Download Restriction: no

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 520.

as
in new window

Length:
Date of creation: 01 Dec 2010
Date of revision:
Handle: RePEc:oxf:wpaper:520
Contact details of provider: Postal: Manor Rd. Building, Oxford, OX1 3UQ
Web page: http://www.economics.ox.ac.uk/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Rawski, Thomas G., 2002. "Will investment behavior constrain China's growth?," China Economic Review, Elsevier, vol. 13(4), pages 361-372, December.
  2. Bowsher, Clive G., 2002. "On testing overidentifying restrictions in dynamic panel data models," Economics Letters, Elsevier, vol. 77(2), pages 211-220, October.
  3. John Knight & Sai Ding, 2009. "Why does China invest so much?," Economics Series Working Papers 441, University of Oxford, Department of Economics.
  4. 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.
  5. Barry Naughton, 2007. "The Chinese Economy: Transitions and Growth," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640643, June.
  6. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
  7. Stephen Bond & Julie Ann Elston & Jacques Mairesse & Beno�t Mulkay, 2003. "Financial Factors and Investment in Belgium, France, Germany, and the United Kingdom: A Comparison Using Company Panel Data," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 153-165, February.
  8. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  9. Stephen Nickell & D Nicolitsas, 1995. "How Does Financial Pressure Affect Firms?," CEP Discussion Papers dp0266, Centre for Economic Performance, LSE.
  10. John Knight & Sai Ding, 2008. "Why has China Grown so Fast? The Role of Structural Change," Economics Series Working Papers 415, University of Oxford, Department of Economics.
  11. Duo Qin & Haiyan Song, 2007. "Sources of Investment Inefficiency: The Case of Fixed-Asset Investment in China," Working Papers 584, Queen Mary University of London, School of Economics and Finance.
  12. Chang, Tai Hsieh & Peter, J- Klenow, 2007. "Misallocation and manufacturing TFP in China and India," MPRA Paper 35084, University Library of Munich, Germany, revised 15 Jun 2007.
  13. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital; Firm Ownership and Investment Efficiency in China," IMF Working Papers 07/9, International Monetary Fund.
  14. Sai Ding & Alessandra Guariglia & John Knight, 2010. "Negative investment in China: financing constraints and restructuring versus growth," Working Papers 2010_04, Durham University Business School.
  15. Alessandra Guariglia & Xiaoxuan Liu & Lina Song, . "Internal Finance and Growth: Microeconometric Evidence on Chinese Firms," Discussion Papers 08/37, University of Nottingham, GEP.
  16. Konings, Jozef & Rizov, Marian & Vandenbussche, Hylke, 2003. "Investment and financial constraints in transition economies: micro evidence from Poland, the Czech Republic, Bulgaria and Romania," Economics Letters, Elsevier, vol. 78(2), pages 253-258, February.
  17. Loren Brandt & Johannes Van Biesebroeck & Yifan Zhang, 2009. "Creative Accounting or Creative Destruction? Firm-level Productivity Growth in Chinese Manufacturing," NBER Working Papers 15152, National Bureau of Economic Research, Inc.
  18. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  19. Sai Ding & John Knight, 2011. "Why has China Grown So Fast? The Role of Physical and Human Capital Formation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(2), pages 141-174, 04.
  20. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  21. Firth, Michael & Lin, Chen & Wong, Sonia M.L., 2008. "Leverage and investment under a state-owned bank lending environment: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 642-653, December.
  22. Hendershott, Robert J., 1996. "Which Takeover Targets Overinvest?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(04), pages 563-580, December.
  23. Becker Bo & Sivadasan Jagadeesh, 2010. "The Effect of Financial Development on the Investment-Cash Flow Relationship: Cross-Country Evidence from Europe," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-49, May.
  24. Shaomin Li, 2004. "The Puzzle of Firm Performance in China: An Institutional Explanation," Economic Change and Restructuring, Springer, vol. 37(1), pages 47-68, March.
  25. Wei, Zuobao & Xie, Feixue & Zhang, Shaorong, 2005. "Ownership Structure and Firm Value in China's Privatized Firms: 1991–2001," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 87-108, March.
  26. Lang, Larry & Ofek, Eli & Stulz, Rene M., 1996. "Leverage, investment, and firm growth," Journal of Financial Economics, Elsevier, vol. 40(1), pages 3-29, January.
  27. Carpenter, Robert E. & Guariglia, Alessandra, 2008. "Cash flow, investment, and investment opportunities: New tests using UK panel data," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1894-1906, September.
  28. Xia, Jun & Li, Shaomin & Long, Cheryl, 2009. "The Transformation of Collectively Owned Enterprises and its Outcomes in China, 2001-05," World Development, Elsevier, vol. 37(10), pages 1651-1662, October.
  29. James Riedel & Jing Jin & Jian Gao, 2007. "Overview of Economic Reforms and Outcomes, from How China Grows: Investment, Finance, and Reform
    [How China Grows: Investment, Finance, and Reform]
    ," Introductory Chapters, Princeton University Press.
  30. Jun, Zhang, 2003. "Investment, investment efficiency, and economic growth in China," Journal of Asian Economics, Elsevier, vol. 14(5), pages 713-734, October.
  31. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  32. Chen, Shimin & Sun, Zheng & Tang, Song & Wu, Donghui, 2011. "Government intervention and investment efficiency: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 259-271, April.
  33. Servaes, Henri, 1994. "Do Takeover Targets Overinvest?," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 253-77.
  34. Bond, Stephen & Van Reenen, John, 2007. "Microeconometric Models of Investment and Employment," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 65 Elsevier.
  35. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
  36. Andrew Benito & Ignacio Hernando, 2007. "Firm Behaviour And Financial Pressure: Evidence From Spanish Panel Data," Bulletin of Economic Research, Wiley Blackwell, vol. 59(4), pages 283-311, October.
  37. Gang Gong & Justin Yifu Lin, 2005. "Deflationary Expansion : an Overshooting Perspective to the Recent Business Cycle in China," Macroeconomics Working Papers 21959, East Asian Bureau of Economic Research.
  38. Alessandra Guariglia, . "Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms," Discussion Papers 07/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  39. D'Mello, Ranjan & Miranda, Mercedes, 2010. "Long-term debt and overinvestment agency problem," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 324-335, February.
  40. Ahn, Seoungpil & Denis, David J. & Denis, Diane K., 2006. "Leverage and investment in diversified firms," Journal of Financial Economics, Elsevier, vol. 79(2), pages 317-337, February.
  41. Tan, Justin & Li, Shaomin & Xia, Jun, 2007. "When iron fist, visible hand, and invisible hand meet: Firm-level effects of varying institutional environments in China," Journal of Business Research, Elsevier, vol. 60(7), pages 786-794, July.
  42. Thomas W. Bates, 2005. "Asset Sales, Investment Opportunities, and the Use of Proceeds," Journal of Finance, American Finance Association, vol. 60(1), pages 105-135, 02.
  43. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  44. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
  45. Guariglia, Alessandra & Poncet, Sandra, 2008. "Could financial distortions be no impediment to economic growth after all? Evidence from China," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 633-657, December.
  46. Richard Blundell & Steve Bond & Frank Windmeijer, 2000. "Estimation in dynamic panel data models: improving on the performance of the standard GMM estimator," IFS Working Papers W00/12, Institute for Fiscal Studies.
  47. Brown, James R. & Petersen, Bruce C., 2009. "Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 971-984, May.
  48. Aivazian, Varouj A. & Ge, Ying & Qiu, Jiaping, 2005. "The impact of leverage on firm investment: Canadian evidence," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 277-291, March.
  49. repec:cup:jfinqa:v:46:y:2011:i:06:p:1831-1863_00 is not listed on IDEAS
  50. Andrew Benito, 2005. "Financial Pressure, Monetary Policy Effects and Inventories: Firm-level Evidence from a Market-based and a Bank-based Financial System," Economica, London School of Economics and Political Science, vol. 72(286), pages 201-224, 05.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:520. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Caroline Wise)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.