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 language | English |
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Pages (from-to) | 111-130 |
Number of pages | 20 |
Journal | Journal of Corporate Finance |
Volume | 36 |
Early online date | 20 Oct 2015 |
DOIs | |
Publication status | Published - Feb 2016 |
Keywords
- Under-investment
- Over-investment
- Free cash flow
- Financial constraints
- Agency costs
- China