Articlehybrid2015

A balancing act: Managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market

245 citations0/0 files storedJournal of Corporate Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

Using a large panel of Chinese listed firms over the period 1998–2014, we document strong evidence of investment inefficiency, which we explain through a combination of financing constraints and agency problems. Specifically, we argue that firms with cash flow below (above) their optimal level tend to under- (over-)invest as a consequence of financial constraints (agency costs). Furthermore, focusing on under-investing firms, we highlight that the sensitivities of abnormal investment to free cash flow rise with traditionally used measures of financing constraints, while for over-investing firms, the sensitivities increase with a wide range of firm-specific measures of agency costs.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1998Initial conditions and moment restrictions in dynamic panel data models 1995Another look at the instrumental variable estimation of error-components models 1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1995Initial conditions and moment restrictions in dynamic panel data models 1958The Cost of Capital, Corporation Finance and the Theory of Investment

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