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

Research output: Contribution to journalArticle


External organisations

  • University of Sheffield


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
JournalJournal of Corporate Finance
Early online date20 Oct 2015
Publication statusPublished - Feb 2016


  • business and economics