Hostname: page-component-848d4c4894-nmvwc Total loading time: 0 Render date: 2024-07-03T09:06:12.697Z Has data issue: false hasContentIssue false
  • English
  • Français

Institutions and Corporate Investment: Evidence from Investment-Implied Return on Capital in China

Published online by Cambridge University Press:  06 June 2011

Qiao Liu  and
Alan Siu
Qiao Liu
Affiliation:
Guanghua School of Management, Peking University, 100871, Beijing, PRC, and University of Hong Kong. qiao_liu@gsm.pku.edu.cn
Alan Siu
Affiliation:
School of Economics and Finance, University of Hong Kong, Pokfulam, Hong Kong. asiu@econ.hku.hk
Get access Rights & Permissions [Opens in a new window]

Abstract

We assess the impact of institutions on Chinese firms’ corporate investment in an investment Euler equation framework. We allow the variables measuring institutions to affect the rate at which firm managers discount future investment payoffs. Applying generalized method of moments estimators to large samples of Chinese firms, we estimate the stochastic discount rates derived from actual investment and examine how they vary across institutional variables. We document robust evidence that ownership is the primary institutional factor affecting corporate investment in China. The derived discount rate for a nonstate firm is approximately 10 percentage points higher than that of an otherwise equal state firm. State firms tend to use higher discount rates to invest after they are partially privatized. We also find that firms with higher levels of corporate governance use higher discount rates to make investment.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 6 , December 2011 , pp. 1831 - 1863
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acemoglu, D.; Johnson, S.; and Robinson, J. A.. “The Colonial Origins of Comparative Development: An Empirical Investigation.” American Economic Review, 91 (2001), 1369–1401.CrossRefGoogle Scholar
Allen, F.; Qian, J.; and Qian, M.. “Law, Finance, and Economic Growth in China.” Journal of Financial Economics, 77 (2005), 57–116.CrossRefGoogle Scholar
Bai, C.-E.; Hsieh, C.-T.; and Qian, Y.. “The Return to Capital in China.” Brookings Papers on Economic Activities, 37 (2006), 61–88.CrossRefGoogle Scholar
Bai, C.-E.; Liu, Q.; Lu, Z.; Song, F. M.; and Zhang, J.. “Corporate Governance and Market Valuation in China.” Journal of Comparative Economics, 32 (2004), 599–616.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; and Lundblad, C.. “Does Financial Liberalization Spur Growth?” Journal of Financial Economics, 77 (2005), 3–55.CrossRefGoogle Scholar
Boyreau-Debray, G., and Wei, S.. “Pitfalls of a State-Dominated Financial System: The Case of China.” NBER Working Paper No. 11214 (2005).CrossRefGoogle Scholar
Brandt, L., and Li, H.. “Bank Discrimination in Transition Economies: Ideology, Information, or Incentives?” Journal of Comparative Economics, 31 (2003), 387–413.CrossRefGoogle Scholar
Cai, H., and Liu, Q.. “Competition and Corporate Tax Avoidance: Evidence from Chinese Industrial Firms.” The Economic Journal, 119 (2009), 764–795.CrossRefGoogle Scholar
Chirinko, R. S., and Schaller, H.. “A Revealed Preference Approach to Understanding Corporate Governance Problems: Evidence from Canada.” Journal of Financial Economics, 74 (2004), 181–206.CrossRefGoogle Scholar
Claessens, S., and Laeven, L.. “Financial Development, Property Rights, and Growth.” Journal of Finance, 58 (2003), 2401–2436.CrossRefGoogle Scholar
Cochrane, J. H. “Production-Based Asset Pricing and the Link between Stock Returns and Economic Fluctuations.” Journal of Finance, 46 (1991), 209–237.Google Scholar
Cochrane, J. H. Asset Pricing. Princeton, NJ: Princeton University Press (2001).Google Scholar
Cull, R., and Xu, L. C.. “Who Gets Credit? The Behavior of Bureaucrats and State Banks in Allocating Credit to Chinese State-Owned Enterprises.” Journal of Development Economics, 71 (2003), 533–559.CrossRefGoogle Scholar
Démurger, S.; Sachs, J. D.; Woo, W. T.; Bao, S.; and Chang, G.. “The Relative Contributions of Location and Preferential Policies in China’s Regional Development: Being in The Right Place and Having the Right Incentives.” China Economic Review, 13 (2002), 444–465.CrossRefGoogle Scholar
Dewenter, K. L., and Malatesta, P. H.. “State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity.” American Economic Review, 91 (2001), 320–334.CrossRefGoogle Scholar
Dollar, D., and Wei, S.-J.. “Das (wasted) Kapital: Firm Ownership and Investment Efficiency in China.” NBER Working Paper 13103 (2007).CrossRefGoogle Scholar
Fan, G., and Wang, X. L.. NERI Index of Marketization of China’s Provinces. Beijing: Economics Science Press (in Chinese) (2004).Google Scholar
Farrell, D.; Lund, S.; and Morin, F.. “How Financial-System Reform Could Benefit China.” McKinsey Quarterly (2006), 92–105.Google Scholar
Forbes, K. J. “One Cost of the Chilean Capital Controls: Increased Financial Constraints for Smaller Traded Firms.” Journal of International Economics, 71 (2007), 294–323.CrossRefGoogle Scholar
Grenadier, S. R. “The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets.” Journal of Finance, 51 (1996), 1653–1679.CrossRefGoogle Scholar
Grenadier, S. R. “Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms.” Review of Financial Studies, 15 (2002), 691–721.CrossRefGoogle Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Does Local Financial Development Matter?” Quarterly Journal of Economics, 119 (2004), 929–969.CrossRefGoogle Scholar
Hsieh, C.-T., and Klenow, P. J.. “Misallocation and Manufacturing TFP in China and India.” Quarterly Journal of Economics, 124 (2009), 1403–1448.CrossRefGoogle Scholar
Huang, Y. “Selling China: Foreign Direct Investment During the Reform Era.” Cambridge, UK: Cambridge University Press (2003).Google Scholar
Kang, Q.; Liu, Q.; and Qi, R.. “The Sarbanes-Oxley Act and Corporate Investment: A Structural Assessment.” Journal of Financial Economics, 96 (2010), 291–305.CrossRefGoogle Scholar
Kornai, J. The Economics of Shortage. Amsterdam: North-Holland (1980).Google Scholar
Levine, R., and Zervos, S.. “Stock Market, Banks, and Economic Growth.” American Economic Review, 88 (1998), 537–558.Google Scholar
Li, K.; Yue, H.; and Zhao, L.. “Ownership, Institutions, and Capital Structure: Evidence from China.” Journal of Comparative Economics, 37 (2009), 471–490.CrossRefGoogle Scholar
Liu, L. X.; Whited, T. M.; and Zhang, L.. “Investment-Based Expected Stock Returns.” Journal of Political Economy, 117 (2009), 1105–1139.CrossRefGoogle Scholar
Love, I. “Financial Development and Financing Constraints: International Evidence from the Structural Investment Model.” Review of Financial Studies, 16 (2003), 765–791.CrossRefGoogle Scholar
Qian, Y., and Xu, C.. “The M-Form Hierarchy and China’s Economic Reform.” European Economic Review, 37 (1993), 541–548.CrossRefGoogle Scholar
Rajan, R. G., and Zingales, L.. “Financial Dependence and Growth.” American Economic Review, 88 (1998), 559–586.Google Scholar
Whited, T. M. “Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data.” Journal of Finance, 47 (1992), 1425–1460.CrossRefGoogle Scholar
Whited, T. M. “Why Do Investment Euler Equations Fail?” Journal of Business and Economic Statistics, 16 (1998), 469–488.CrossRefGoogle Scholar
Whited, T. M., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.CrossRefGoogle Scholar
Williams, J. T. “Equilibrium and Options on Real Assets.” Review of Financial Studies, 6 (1993), 825–850.CrossRefGoogle Scholar
Wurgler, J. “Financial Markets and the Allocation of Capital.” Journal of Financial Economics, 58 (2000), 187–214.CrossRefGoogle Scholar
Young, A. “The Razor’s Edge: Distortions and Incremental Reform in the People’s Republic of China.” Quarterly Journal of Economics, 115 (2000), 1091–1135.CrossRefGoogle Scholar
Zhang, L. “The Value Premium.” Journal of Finance, 60 (2005), 67–103.CrossRefGoogle Scholar