Does China overinvest ? evidence from a panel of Chinese firms

Ding, Sai; Guariglia, Alessandra; Knight, John

Abstract

This paper addresses the hotly-debated question: do Chinese firms overinvest? A firm-level dataset of 100,000 firms over the period of 2000-07 is employed for this purpose. We initially calculatemeasures of investment efficiency, which is typically negatively associated with overinvestment. Despite wide disparities across various ownership groups, industries and regions, we find thatcorporate investment in China has become increasingly efficient over time. However, based on directmeasures of overinvestment that we subsequently calculate, we find evidence of overinvestment forall types of firms, even in the most efficient and most profitable private sector. We find that the freecash flow hypothesis provides a good explanation for China‟s overinvestment, especially for theprivate sector, while in the state sector, overinvestment is attributable to the poor screening andmonitoring of enterprises by banks

Citation

Ding, S., Guariglia, A., & Knight, J. (2010). Does China overinvest ? evidence from a panel of Chinese firms

• Working Paper Type: Working Paper
• Publication Date: Jan 1, 2010
• Deposit Date: Dec 7, 2012
• Publicly Available Date: Dec 7, 2012
• Series Title: Durham University Business School Economics Finance Accounting Working Papers
• Keywords: Overinvestment, Investment efficiency, Free cash flow, Debt, China. JEL classifcation: G31 O16 O53.
• Public URL: https://durham-repository.worktribe.com/output/1699640
• Publisher URL: http://www.dur.ac.uk/business/faculty/working-papers/