Investment Efficiency, Government Intervention And Cash Flow Sensitivity

Some of the existing literatures indicate low investment efficiency of state-owned enterprises (SOE). In this paper, I investigate whether government intervention, as another form of friction, distorts firms’investment behavior and leads to investment inefficiency. Using a sample of listed A share manufacturing industry enterprises from 2001-2012,1 found that government intervention indeed reduced the investment efficiency of the state-owned enterprises. What’s more, the inefficiency of SOEs is mainly characterized by overinvestment behavior. I attribute this finding to that government using the state-owned enterprises they controlled to fulfill their multiple socio-economic objectives. Furthermore, I tried to explain this phenomenon by investigating the difference in their funding behavior. I studied the relation between the fixed asset investments and internally generated cash flows of these companies and find that it is U-shaped. Investment and internal cash flow are negatively related for low levels of cash flow but positively related for high levels of cash flow. What’s more, government controlled listed firms have greater investment-cash flow sensitivities than privately controlled listed companies when cash flow is negative. In conclusion, invisible security background and soft budget constraint problem are the potential explanations exacerbating the deviation from the optimal investment level of government controlled enterprise.