Capital misallocation in Chinese industrial firms

Le Tang, Jun Zhang and Jim Huangnan Shen

Scottish Journal of Political Economy, 2024, vol. 71, issue 1, 75-100

Abstract: This paper investigates the impact of volatility in profitability shock, capital price distortion and adjustment costs on capital misallocation among Chinese industrial firms. We estimate a dynamic model pertaining firms' investment decision, incorporating institutional differences between state and private firms, so the model can reproduce salient features observed from Chinese firms. Our analysis shows: (i) capital price distortion is more severe among state firms than private ones; (ii) adjusting capital is more costly for state than private firms; (iii) volatility in profitability shock is a major source that causes capital misallocation for both types of firms.

Date: 2024
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https://doi.org/10.1111/sjpe.12354

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