Investment Behavior In China's Listed Companies' Financial Difficulties

As the development of the stock market in China, Sepecial Treated (ST) Firms have been scholars' focus recently and they are always considered as financial distressed firms. It is predicted that behaviors of such firms will show many differences from the healthy ones, including the investment decisions. In the meantime, investment will influence the firms' condition and may help the firms resolve the problem.This study defines two kinds of distressed firms which are mainly based on interest coverage ratio and special treated (ST) by the stock exchange respectively, called Distressed Firms I and Distressed Firms II. After carefully comparing the investment-cash flow sensitivity between the healthy firms and distressed ones, it can be concluded that their cash flow sensitivities are indeed different that distressed firms are more sensitive to their financial condition proxies. But in the subsample of Distress Firms I whose net income are positive, their investment behavior is similar to that in the healthy firms. On the contrary, the Distreesed Firms II and negative net income holding firms in Distressed I both show zero investment-cash flow sensitivity but high sensitivities to interest coverage ratio or size of the firms alternatively.Subsequently, the study examines two potential investment behaviors' influences to the distreesed firms: contracting investment and expanding investment. It is observed that more than 70% of the distressed firms choose to contract their investment while less than 20% of them choose the opposite. According to the Binary Logistic Regression results, the effect of expanding investment may not be so clear but it is verified that contracting investment will mitigate financial distress for the Distress Firms II.