Financial factors and company investment decisions in transitional China

Liu, J; Pang, D

Abstract

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.

Citation

Liu, J., & Pang, D. (2009). Financial factors and company investment decisions in transitional China. Managerial and Decision Economics, 30(2), 91-108. https://doi.org/10.1002/mde.1440

• Journal Article Type: Article
• Publication Date: Jan 1, 2009
• Deposit Date: Oct 28, 2011
• Journal: Managerial and Decision Economics
• Print ISSN: 0143-6570
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 30
• Issue: 2
• Pages: 91-108
• DOI: https://doi.org/10.1002/mde.1440
• Publisher URL: http://dx.doi.org/10.1002/mde.1440