State-ownership and financial constraints on investment of Chinese-listed firms: new evidence

Abstract

We examine how state-ownership affects financial constraints on investment of Chinese-listed firms during 1999–2008. We find that although an average sample firm experiences some degree of financial constraints, state-ownership does not necessarily help in reducing the firm's financial constraints on investment. Further evidence shows that state-ownership does not lead to more borrowing from the Chinese banking sector, implying that state-ownership does not necessarily reduce the firm's financial constraints via the state-controlled banking sector. We consider not only the standard factors in the investment equation, but also the firm's equity financing behaviour explicitly. The result is robust to both the conventional proxy for financial constraints, i.e. the investment–cash-flow sensitivity, and a recently developed proxy for financial constraints, i.e. the KZ index. Our results suggest that China's corporatisation movement is effective in that soft budget constraints once enjoyed by former state-owned enterprises have been removed along with the progress of corporatisation. These firms, although still state-involved, can be seen as modern corporations operating in a market environment.

Keywords:

• fixed investment
• financial constraints
• state-ownership
• listed firms
• China

JEL Classification: :

• D21
• D92
• G31
• H32

Acknowledgements

Hsiang-Chun Michael Lin thanks Prof. Xiaming Liu at Birkbeck College for additional supervision for his PhD project and he also thanks the Bloomsbury Colleges PhD Studentship, University of London for their financial support. Hong Bo acknowledges the British Academy Small Research Grants on the project ‘Comparative Corporate Investment Behaviour: UK and China’. Anonymous referees are acknowledged for comments and suggestions on an earlier version of the paper.

Notes

For example, in Guariglia, Liu, and Song (2011), less than 0.3% of the firms in their sample are publicly listed.

These groups include private firms, SOEs, collective-owned enterprises (COEs), and foreign invested enterprises, where a firm is classified as an SOE if the state owns either directly or indirectly more than 25% of the firm's total shares. In the empirical analysis, they treat COEs as SOEs because COEs’ are directly associated with local governments.

Guariglia, Liu, and Song (2011) classify the firms into various categories depending on each firm's largest shareholder, for example, SOEs are firms with the state being the largest shareholder, while firms with legal persons or individuals as the largest shareholder are considered as private firms by them. They use different criteria from Poncet, Steingress, and Vandenbussche (2010).

All the mean values of the variables, except for the sales growth rate, compared between the two groups of observations have t-test significance level at 1% or lower, i.e. the null hypothesis of no difference in the means is rejected for all variables except for the sales growth rate.