Financial factors and company investment decisions in transitional China

Jia Liu, Dong Pang

Research output: Contribution to journalArticlepeer-review


We investigate the propensity of Chinese publicly listed firms to invest in response to financial factors, according to the a priori degree of a firm’s information problems: industry sector, ownership structure and firm size. The firms in primary and tertiary industries are found to be liquidity-constrained in their investment decisions. The investment-cash flow sensitivity of the firms in secondary industry indicates that they lost privileged access to credit in the course of China’s market transition. However, we find no evidence that financial liberalization resulted in an easing of financing constraints for small- and medium-sized firms. Our result indicates that agency problems, stemming from a state-controlling pyramidal ownership structure, are responsible for the misallocation of internal funds. The importance of bankruptcy and agency costs in relation to debt finance for certain types of borrowers reflects the transitional nature of the financial environment facing Chinese firms.
Original languageEnglish
Pages (from-to)91-108
Number of pages18
JournalManagerial and Decision Economics
Issue number2
Early online date4 Nov 2008
Publication statusPublished - 1 Mar 2009


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