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

Alessandra Guariglia and Junhong Yang

Journal of Corporate Finance, 2016, vol. 36, issue C, 111-130

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, while for over-investing firms, the sensitivities increase with a wide range of firm-specific measures of agency costs.

Keywords: Under-investment; Over-investment; Free cash flow; Financial constraints; Agency costs; China (search for similar items in EconPapers)
JEL-codes: G31 G32 O16 O53 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (89)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0929119915001273
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:36:y:2016:i:c:p:111-130

DOI: 10.1016/j.jcorpfin.2015.10.006

Access Statistics for this article

Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter

More articles in Journal of Corporate Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().