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

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

doi:10.1016/j.jcorpfin.2012.01.004

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

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

Department of Finance and Insurance

Research output: Journal Publications › Journal Article (refereed) › peer-review

146 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 language	English
Pages (from-to)	433-450
Number of pages	18
Journal	Journal of Corporate Finance
Volume	18
Issue number	3
DOIs	https://doi.org/10.1016/j.jcorpfin.2012.01.004
Publication status	Published - 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).

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 8 Decent Work and Economic Growth

Keywords

Corporate investment
Government control
Cash flows
Financing channels
China

Access to Document

10.1016/j.jcorpfin.2012.01.004

Cite this

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

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{\textendash}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{\textendash}cash flow sensitivities of government controlled and privately controlled listed firms.",

keywords = "Corporate investment, Government control, Cash flows, Financing channels, China",

author = "FIRTH, \{Michael Arthur\} and MALATESTA, \{Paul H.\} and Qingquan XIN and Liping XU",

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AU - FIRTH, Michael Arthur

AU - MALATESTA, Paul H.

AU - XIN, Qingquan

AU - XU, Liping

PY - 2012/6/1

Y1 - 2012/6/1

N2 - 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.

AB - 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.

KW - Corporate investment

KW - Government control

KW - Cash flows

KW - Financing channels

KW - China

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DO - 10.1016/j.jcorpfin.2012.01.004

M3 - Journal Article (refereed)

SN - 0929-1199

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EP - 450

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

IS - 3

ER -

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

Abstract

Funding

UN SDGs

Keywords

Access to Document

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