Financial factors and company investment decisions in transitional China
Article first published online: 4 NOV 2008
Copyright © 2008 John Wiley & Sons, Ltd.
Managerial and Decision Economics
Volume 30, Issue 2, pages 91–108, March 2009
How to Cite
Liu, J. and Pang, D. (2009), Financial factors and company investment decisions in transitional China. Manage. Decis. Econ., 30: 91–108. doi: 10.1002/mde.1440
- Issue published online: 19 JAN 2009
- Article first published online: 4 NOV 2008
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.