Do Public Firms Have Higher Investment Efficiency?

Promoting the efficiency of resource allocation is one of the core functions of stock market. However, could the stock market really help to improve investment efficiency? On the one hand, to be listed help firm access to public capital markets, increase financing negotiation skills, enhance information transparency, so as to ease the financial constraints. On the other hand, a stock market listing may also lead to agency problems as ownership and managerial control are separated and manager’s interests diverge from those of their investors. To reduce agency cost, there is need to perfect the internal corporate governance and develop the supervision function of the capital market. Based on the literature of investment-cash flow sensitivity, this paper focuses on the particular differences of the investment efficiency between private and public firms and further studies the causes of the differences from two aspects: financial constraints and agency problem.With a data set of all A-share listed firms and private firms during2002to2010of China, the empirical results show that, in general, the investment efficiency of public firms is better than that of private firms. Specifically speaking, relative to the private firms, the correlation of poor cash flow-underinvestment is lower for public firms and this is caused by lower financial constraints; however, the correlation of rich cash flow-overinvestment is not lower, but even higher for public firms than private firms and this is caused by the higher agency cost. Thus, this paper conclude that listed, on the whole, could help to improve investment efficiency. But this improvement of investment efficiency is limited to firms which have investment opportunities but lack of internal cash flow, and cannot help to improve the investment efficiency of firms that have excessive internal cash flow and overinvest. These results verify the financial constraints theory and agency problem theory of investment efficiency, but fail to support that financial reporting quality could play a role in solving the problem of financial constraints and agency problem.By using a more widely and representative sample which includes private firms and distinguishing the two aspects of investment efficiency:the poor cash flow-underinvestment correlation and the rich cash flow-overinvestment correlation, this paper compares the investment efficiency of public and private firms. This study, on the one hand, provides a new empirical test of investment efficiency which is one of classic research problem in finance; on the other hand, provides evidence about the influence of stock market on the enterprise micro level, and thus provides referenced information for policy-making.