The Quality Of Local Government,Financing Constraints And Corporate Investment

In 1958, Modigliani and Miller proposed the famous MM theorem,created the modern capital structure theory.It points out that under the assumption of perfect market,the market value of enterprise is not affected by enterprise’s financing decision, and investment decision also has nothing to do with the capital structure of the enterprise.Perfect market assumptions,however, is too harsh, the existence of asymmetric information and agency problems make the cost of financing vary due to the different sources of capital,and the investment strategy is related to capital structure which makes most firms face financing constraints problems.Since the tax reform in 1994, local governments are endowed with large power in local economic affairs.The great attenion at GDP in the officer promotion appraisal system enhance intervention motives of the local government to the economic activity.Intervention in economic activity of the enterprise is inseparable from the control of resources.On the one hand,the local government control corporate activity indirectly through the control of the finance, energy and other core capital;on the other hand,They intervene the enterprise economy activity directly by by formulating relevant policy or relying on attachment relationship between government and enterprises. The quality of local government has a significant impact on enterprise capability and efficiency of resource allocation.Based on 1333 non-bankind panel data of Shanghai and Shenzhen A-share market listed companies from 2006 to 2012, This paper examines the quality of provincial local government to the investment spending,the investment efficiency and the impact of financing constraints with the help of Tobin’s Q model. Furthermore,this paper studied the investment and financing conditions affected by the quality of local government in different ownership of the property.In this paper.the results of this study show that the investment spending and Tobin’s Q that represents investment opportunities is positively correlated.This positive correlation strengthens with the improvement of quality of government.; Listed company’s investment expenditure is positively correlated with enterprise operating cash flow,this positive relationship become weakened with the improvement of quality of the government.This shows that most listed-companies in China are faced with financing constraints.In order to make an in-depth study of the influence on investment and financing of ownership of enterprise property,this paper investigates the different impact of the quality of provincial local governments to the investment and financing between state-owned and non-state-owned listed companies, also between central-government-owned and local-government-owned.Compared with state-owned listed companies,the quality of provincial local government has a greater impact on investment and financing of the non-state-owned listed companies; compared with central-government-owned listed companies,the quality of provincial local government has a greater impact on investment and financing of the local-government-owned listed companies.In the analysis of the effect of investment, we found that the higher the quality of the local government area is, the greater revenue growth the investment can bring in. Finally,embarking from the angles of government and enterprises,this article put forward the policy Suggestions of how to improve the present situation of investment and finance for listed company.