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Financing and monitoring in an emerging economy: Can investment efficiency be increased?

Author

Listed:
  • Khan, Muhammad Kaleem
  • He, Ying
  • Akram, Umair
  • Sarwar, Suleman

Abstract

This study investigates the influence of the financial system on firms' investment efficiency in China. For this purpose, we employ country level data of capital markets and financial institutions along with financial data from 2797 Chinese firms in the period from 1998 to 2015. The firms are priori classified into four groups, by high and low values of financial constraints and agency problems. Results show that financial development influences firms' investments positively either directly or by reducing cash flow sensitivity. The impact remains the same for all types of firms. Moreover, the financial structure has an impact on investment efficiency of firms; this result also remains the same even after controlling levels of financial development. Study contributes that capital market based financial structure impacts investment decisions by reducing financing constraints and agency issue due to its strong monitoring ability.

Suggested Citation

  • Khan, Muhammad Kaleem & He, Ying & Akram, Umair & Sarwar, Suleman, 2017. "Financing and monitoring in an emerging economy: Can investment efficiency be increased?," China Economic Review, Elsevier, vol. 45(C), pages 62-77.
    • Handle: RePEc:eee:chieco:v:45:y:2017:i:c:p:62-77
    DOI: 10.1016/j.chieco.2017.05.012
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    Citations

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    Cited by:

    1. Xia, Changyuan & Chan, Kam C. & Cao, Chunfang & Tan, Youchao, 2021. "Generalized trust, personalized trust, and dynamics of capital structure: Evidence from China," China Economic Review, Elsevier, vol. 68(C).
    2. Mao, Jinzhou & Yang, Siying, 2024. "Changes in supply chain relationships and the enterprise internationalization process," Research in International Business and Finance, Elsevier, vol. 67(PB).
    3. Ammar Hussain & Minhas Akbar & Muhammad Kaleem Khan & Ahsan Akbar & Mirela Panait & Marian Catalin Voica, 2020. "When Does Earnings Management Matter? Evidence across the Corporate Life Cycle for Non-Financial Chinese Listed Companies," JRFM, MDPI, vol. 13(12), pages 1-19, December.
    4. Zhao, Lingxiao & Liu, Xiao & Tang, Yunpeng & Zhang, Wenjing, 2024. "Functional subsidies, selective subsidies and corporate investment efficiency: Evidence from China," Emerging Markets Review, Elsevier, vol. 61(C).
    5. Wang, Baixun & Zhao, Wenjuan, 2022. "Interplay of renewable energy investment efficiency, shareholder control and green financial development in China," Renewable Energy, Elsevier, vol. 199(C), pages 192-203.
    6. Li, Xiao-Lin & Xie, Pinyi & Ding, Hui & Si, Deng-Kui, 2023. "Central bank lending facility and investment efficiency of non-SOEs: evidence from China," Economic Modelling, Elsevier, vol. 126(C).
    7. Muhammad Kaleem Khan & Chunhui Huo & R. M. Ammar Zahid & Umer Sahil Maqsood, 2024. "The automated sustainability auditor: Does artificial intelligence curtail greenwashing behavior in Chinese firms?," Business Strategy and the Environment, Wiley Blackwell, vol. 33(8), pages 9015-9039, December.
    8. Muhammad Kaleem Khan & R. M. Ammar Zahid & Adil Saleem & Judit Sági, 2021. "Board Composition and Social & Environmental Accountability: A Dynamic Model Analysis of Chinese Firms," Sustainability, MDPI, vol. 13(19), pages 1-18, September.
    9. Kong, Dongmin & Ji, Mianmian, 2024. "Individual investors’ dividend tax reform and investment efficiency," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1102-1119.
    10. Shahid Ali & Junrui Zhang & Muhammad Usman & Farman Ullah Khan & Amir Ikram & Bilal Anwar, 2019. "Sub-National Institutional Contingencies and Corporate Social Responsibility Performance: Evidence from China," Sustainability, MDPI, vol. 11(19), pages 1-21, October.
    11. Mengqin Zhang & Yi He & Surui Zhang & Xiang Zhang & Stavros Sindakis & Saloome Showkat, 2024. "Stock Liquidity and Investment Efficiency: Evidence from the New Regulation of Insider Selling in China," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 8563-8587, June.
    12. Ammar Hussain & Minhas Akbar & Muhmmad Kaleem Khan & Marcela Sokolová & Ahsan Akbar, 2022. "The Interplay of Leverage, Financing Constraints and Real Earnings Management: A Panel Data Approach," Risks, MDPI, vol. 10(6), pages 1-21, May.
    13. Muhammad Kaleem Khan & Yixuan Qin & Chengsi Zhang, 2022. "Financial structure and earnings manipulation activities in China," The World Economy, Wiley Blackwell, vol. 45(8), pages 2593-2621, August.
    14. Muhammad Kaleem Khan & Ahmad Kaleem & Salman Zulfiqar & Umair Akram, 2019. "Innovation Investment: Behaviour Of Chinese Firms Towards Financing Sources," International Journal of Innovation Management (ijim), World Scientific Publishing Co. Pte. Ltd., vol. 23(07), pages 1-29, October.
    15. Wang, Ren & Hou, Jie & Jiang, Zhujun, 2021. "Environmental policies with financing constraints in China," Energy Economics, Elsevier, vol. 94(C).
    16. Jiang, Dequan & Li, Weiping & Shen, Yongjian & Zhang, Ying, 2022. "Does air quality affect firms’ investment efficiency? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 1-17.
    17. Naeem, Kashif & Li, Matthew C., 2019. "Corporate investment efficiency: The role of financial development in firms with financing constraints and agency issues in OECD non-financial firms," International Review of Financial Analysis, Elsevier, vol. 62(C), pages 53-68.

    More about this item

    Keywords

    Financial development; Financial structure; Financing constraints; Agency cost; Investments;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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