Equity Nature, Financing Sources And Investment Decision-making Research

In the neoclassical Modigliani-Miller world,the investment decisions depend on the investment opportunities and firm's financing decisions do not matter.But recent theoretical development points to the financial constraints faced by firm with investment opportunities and financial structure of the firm can affect its investment decisions and ultimately the firm value(Mayers and Majluf(1984) etc.).There is accumulating empirical evidence to support this view(Lang,Ofek and Stulz(1996) etc.).In China,despite the improvement of the financial system in the past 30 years of economic reform,anecdotal evidence shows firms in general still face impediments in financing projects.For example,the interest rates commercial banks can charge are set by the central banks and not determined by the market.Credit rationing can be severe particularly for smaller and privately owned companies.This paper analyzes financial constraints on investment and its impact on efficiency for two distinctive groups of companies:state-controlled listed companies and non-state-controlled listed companies.Using data of Chinese listed companies from 1991 to 2007 and taking into account all channels of financing,i.e.internal cash flows, seasoned equity offering and debt,we find significant impact of financial constraints for both groups,and also state-controlled firms face much less constraints.Specifically,high debt ratio imposes a severe constraint on firm's investment,only state-controlled firms are much less affected.Firm's investment decision is sensitive to its cash flow,with state-controlled firms much less so.The fact state-controlled firms are less financially constrained lead to higher investments and their efficiency are generally low.This points to the problems of both agency costs and moral hazard of the managers.