Estimating Corporate Investment Efficiency with Bias Correction: A Semiparametric Panel Model Approach

Taining Wang, Zhao Wang, Feng Yao and Subal Kumbhakar
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Taining Wang: Capital University of Economics and Business
Zhao Wang: Capital University of Economics and Business
Feng Yao: West Virginia University
Subal Kumbhakar: Binghamton University

No 26-01, Working Papers from Department of Economics, West Virginia University

Abstract: Empirical studies often use the residuals from ordinary least squares regression models to represent certain discretionary or unexpected components and then regress these residuals on potential determinants. However, this two-step approach has been criticized for leading to biased estimates, invalid inferences, and unreliable empirical results. This paper shows that the shortcomings of the two-step approach and alternative existing methodologies are retained and even more pronounced when analyzing inefficient corporate investment. To address these shortcomings, we propose a novel semiparametric model tailored for investment efficiency analysis. Our model effectively mitigates estimation bias caused by inappropriate model design or misspecified model structure, and accurately discerns over-investment, under-investment, and efficient investment along with their respective probabilities. Applying our model to a sample of Chinese listed firms reveals significant, previously obscured nonlinear impacts of Tobin’s q and sales on investment. Our results reveal pronounced tendencies towards over-investment, contradictory to existing models which reveal opposite tendencies towards under-investment. Our model is applicable to various types of efficiency analysis, where each firm may exhibit different performance outcomes with associated probabilities.

Keywords: Additive model; fixed effects; investment efficiency; stochastic model; three-regime composite error (search for similar items in EconPapers)
JEL-codes: C23 C33 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2026-01
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