A balancing act: managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market

Alessandra Guariglia, Junhong Yang

Research output: Contribution to journalArticlepeer-review

57 Citations (Scopus)
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Abstract

Using a large panel of Chinese listed firms over the period 1998-2014, we document strong evidence of investment inefficiency, which we explain through a combination of financing constraints and agency problems. Specifically, we argue that firms with cash flow below (above) their optimal level tend to under (over-)invest as a consequence of financial constraints (agency costs). Furthermore, focusing on under-investing firms, we highlight that the sensitivities of abnormal investment to free cash flow rise with traditionally used measures of financing constraints, whilst for over-investing firms, the sensitivities increase with a wide range of firm-specific measures of agency costs.
Original languageEnglish
Pages (from-to)111-130
Number of pages20
JournalJournal of Corporate Finance
Volume36
Early online date20 Oct 2015
DOIs
Publication statusPublished - Feb 2016

Keywords

  • Under-investment
  • Over-investment
  • Free cash flow
  • Financial constraints
  • Agency costs
  • China

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