A balancing act: Managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market |
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Institution: | 1. Department of Economics, University of Birmingham, Birmingham B15 2TT, United Kingdom;2. Management School, University of Sheffield, Conduit Road, Sheffield S10 1FL, United Kingdom |
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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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