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REGIONAL DISPARITIES AND INVESTMENT–CASH FLOW SENSITIVITY: EVIDENCE FROM CHINESE LISTED FIRMS

Authors


*Graduate School of Economics, Nagoya University, Chikusa-ku, Nagoya Aichi 464-8601, Japan. E-mail: yamori@soec.nagoya-u.ac.jp. We are grateful to Kei Tomimura, Li Jie, Zhu Hongfei and Cong Zhonghua for their help. All remaining errors are the responsibility of the authors. Jianjun Sun thanks financial support from Chinese New Century Excellent Talents in University (Program No. NCET-07-0249). Yamori's research was financially supported by a Grant-in-Aid for Scientific Research (KAKENHI) from the Japanese Government.

Abstract

In China, regional disparities are significant. We find that firms in inland regions rely more on their internal funds in terms of their investment activities than those in coastal regions, and that the sensitivity gap between inland and coastal firms widened in the recent contractionary monetary policy period. This suggests that firms in inland regions find it harder to obtain outside funds due to the unfavourable social and economic environments they face. Our findings suggest that capital markets in China respond rationally to the potential impact of regional disparities on a firm's performance.

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