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Do firms care about investment opportunities? Evidence from China

TLDR
In this paper, the authors explore the role of financial factors in corporate finance from the perspective of economic fundamentals and find that private firms make the most of all types of investment opportunities in China.
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This article is published in Journal of Corporate Finance.The article was published on 2018-10-01 and is currently open access. It has received 27 citations till now. The article focuses on the topics: Investment decisions & Investment (macroeconomics).

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Citations
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China's anti-corruption campaign and firm productivity: Evidence from a quasi-natural experiment

TL;DR: Li et al. as discussed by the authors investigated the causal effects of the anti-corruption campaign on firm-level total factor productivity (TFP) in China and employed a difference-in-differences estimation to show the following results.

The Role of State Owned Enterprises

TL;DR: The Role of State Owned Enterprises assesses the factors required to ensure that state owned enterprises are providing high-quality, competitively priced infrastructure and services to Irish enterprise and are maximising their broader contribution to supporting economic recovery and opportunities for enterprise and innovation as discussed by the authors.
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Institutional Investors, Real Earnings Management and Cost of Equity: Evidence from Listed High-tech Firms in China

TL;DR: In this paper, the authors investigated the association between real earnings management and the cost of equity from the perspective of the heterogeneity of institutional investors, based on a sample of publicly available publicly traded companies.
Journal ArticleDOI

Global oil price uncertainty and excessive corporate debt in China

TL;DR: In this paper , the influence of oil price uncertainty on the excessive debt behavior of Chinese listed companies during 2010-2019 was explored, and it was shown that a global oil price volatility can significantly reduce excessive corporate debt, and the impact is predominant among small, nonstate-owned, non-high-tech, or non-energy firms.
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Do productive firms get external finance? Evidence from Chinese listed manufacturing firms

TL;DR: Li et al. as discussed by the authors found that productivity measured by TFP or labour productivity is statistically and economically important and positive in determining firms' external finance, i.e. total leverage, new issue of equity and long-term debt.
References
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Journal Article

The Cost of Capital, Corporation Finance and the Theory of Investment

TL;DR: In this article, the effect of financial structure on market valuations has been investigated and a theory of investment of the firm under conditions of uncertainty has been developed for the cost-of-capital problem.
Journal ArticleDOI

Corporate financing and investment decisions when firms have information that investors do not have

TL;DR: In this paper, a firm that must issue common stock to raise cash to undertake a valuable investment opportunity is considered, and an equilibrium model of the issue-invest decision is developed under these assumptions.
Journal ArticleDOI

Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?

TL;DR: In this article, the authors investigated the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment cash flow sensitivity.
Posted Content

The Dynamics Of Productivity In The Telecommunications Equipment Industry

TL;DR: In this article, the authors developed an estimation algorithm that takes into account the relationship between productivity on the one hand, and both input demand and survival on the other, guided by a dynamic equilibrium model that generates the exit and input demand equations needed to correct for the simultaneity and selection problems.
ReportDOI

Financing Constraints and Corporate Investment

TL;DR: In this paper, the authors examine the importance of a financing hierarchy created by capital-market imperfections and find that investment is more sensitive to cash flow for the group of firms that are most likely to face external finance constraints.
Related Papers (5)
Frequently Asked Questions (14)
Q1. What are the contributions in "Do firms care about investment opportunities? evidence from china" ?

Li et al. this paper used a large number of proxies for investment opportunities and a variety of econometric approaches to explore the most important question in corporate finance from the perspective of economic fundamentals. 

Supply-side factors such as productivity and/or product quality may also contaminate the sales growth as a measure of demand-side shock. 

According to Hsieh and Song (2015), the corporatization of surviving SOEs and the entry of new SOEs collectively account for 21% of growth during this period. 

further financial sector reforms could aim at improving the flow of formal finance to the private sector and reducing the availability of low-cost capital to SOEs. 

Dai et al. (2016) show that processing exporters are less productive than non-processing exporters and nonexporters in China, and have inferior performance in many other aspects such as profitability, wages, R&D and skill intensity. 

In column [2], when interacting qD with ownership dummies, the authors find that the investment of private and foreign firms responds more sensitively to qD than other ownership types, and the effect is significant for all measures of qD, that is, one standard deviation increase of qD is associated with a rise of investment rate by 0.04 (net demand shock) to 0.33 (sales growth) but a decline by 0.16 (inventory growth). 

For instance, a value-added tax reform was implemented for this region in July 2004 which generated considerable tax drawback for manufacturing firms and increased their profits. 

focusing on financial constraints alone cannot explain why private firms, which are generally believed to be more financially constrained, invest more and grow faster than unconstrained state-owned enterprises (SOEs), and have become the main driving force of China’s remarkable economic growth in the past few decades. 

The coefficient of foreign firms in regions with low financial development is insignificant, which might be due to the fact that most foreign firms are located in provinces which are more highly developed financially. 

The results are not entirely surprising, as the fundamental q is highly correlated with cash flow, i.e. firms’ investment can be very sensitive to their cash flow when their access to external finance is limited in regions with low financial development. 

Since future profits are predicted based on current values, qF is highly correlated with cash flow and the correlation between these two variables is 0.61. 

Despite the advantages of the system GMM estimator in alleviating potential endogeneity bias and mismeasurement problem in the panel data context, the authors explore the impact of certain exogenous shocks on a firm’s investment, using the Difference-in-Difference approach (hereafter DID) in order to further shed light on the robustness of their findings under these exogenous shocks. 

The standard deviation of investment opportunities across the ownership groups can be found in Table 1.that is, one standard deviation increase of qS leads to a rise of investment rate by 0.06 (GMM) to 0.08 (WLP). 

The authors also report the p-value associated with the t test for the equality of means for corresponding variables between SOEs and private firms.