Research On Investment-cash Flow Sensitivities: Evidence From China

Since the seminal article of Fazzari et al., empirical work has persistently documented positive investment-cash flow sensitivities. And it has been a key topic of corporate finance. Fazzari, Kaplan, Myers, Majluf, Jense, Stiglitz and other famous scholars made significant contributions to the development of this theory. Researches on corporate governance, capital structure dynamic adjustment and other related fields also benefit from its great progress.The reasons that induce this phenomenon can be categorized as asymmetric information, which suggests that investment will fluctuate in internal funds for firms with good prospects when these firms face a premium on external funds, and managerial discretion, which suggests that overinvestment of firms with bad prospects exhaust their free cash flow. This paper investigates the investment-cash flow sensitivity of publicly listed Chinese companies during period of 1999-2000 and 2004-2005. We expect to find the reasons of investment-cash flow sensitivities in China and the key factors that can mitigate the financing constrains of asymmetric information and overinvestments of managerial discretion. We also investigate whether these specific features of Chinese firms have a great impact on investment-cash flow sensitivity.The key conclusions we derived using two-stage least square regression and panel data are: there are significant investment-cash flow sensitivities in China. Asymmetric information accounts for firms with good prospects while managerial discretion for firms with bad prospects. Corporate size and debt ratio play a key role in investment-cash flow sensitivities analyses. By contraries, dividend yield has no significant influence on cash flow coefficient.