Corporate investment, government control, and financing channels : evidence from China's Listed Companies

Michael Arthur FIRTH, Paul H. MALATESTA, Qingquan XIN, Liping XU

Research output: Journal PublicationsJournal Article (refereed)peer-review

129 Citations (Scopus)

Abstract

We investigate the relation between the internally generated cash flows and fixed asset investments of Chinese firms and find that it is U-shaped. Cash flow and investment are negatively related for low levels of cash flow but positively related for high levels of cash flow. We find that government controlled listed firms have greater investment–cash flow sensitivities than do privately controlled listed companies, especially on the left-hand side of the U-shaped curve where cash flow is negative. However, the difference in sensitivities appears only among firms that possess few profitable investment opportunities. We attribute this finding to the government having multiple socio-economic objectives, which leads to increased capital expenditures by the firms it controls when internal funds are abundant and when internal funds are negative. There is no evidence that access to finance and soft budget constraints explain the differences between the investment–cash flow sensitivities of government controlled and privately controlled listed firms.
Original languageEnglish
Pages (from-to)433-450
Number of pages18
JournalJournal of Corporate Finance
Volume18
Issue number3
DOIs
Publication statusPublished - 1 Jun 2012

Funding

We thank the reviewer and the editor, Jeffry Netter, for their insightful comments and suggestions on this paper. The authors also thank Sean Cleary, Paul Povel, Michael Raith, Weiqiang Tan, Yu Xin, Dongmin Kong, Ping Liu and workshop participants at Fudan University, 2008 Chinese Young Economist Forum, Beijing University, Sun Yat-Sen University, Huazhong University of Science and Technology, and Wuhan University for their helpful discussions and suggestions. The National Natural Science Foundation of China supported this study (Project No.: 70702031, 70802067). Firth acknowledges support from a grant from the Research Grants Council of the HKSAR (LU340209).

Keywords

  • Corporate investment; Government control; Cash flows; Financing channels; China

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