Access To External Financing And Firm Investment Efficiency: Evidence from China

Motivated by the institutional setting and based on the extant literature, we raise the following two research questions: (I) how do various sources of external financing affect firms' investment efficiency and investment opportunities in a highly regulated financial market like China? And (ii) what is the effect of government subsidy on investment efficiency and investment opportunities in a government-dominated financial system? Empirical analysis by usingpooled ordinary least squares (OLS) and Fixed Effect (EF) regression model with robust standard error by using STATA software have been employed for this study to examined the effects of various external financing sources on firm investment efficiency and opportunities in China. Using the established measurements of investment efficiency and investment opportunities, we analysed 10,691 firm-year observations from 2002 to 2011, which obtained from Chinese listed firms.We found that, due to the tight control over the eligibility of public and private equity issues set by the China Securities Regulatory Commission (CSRC), Chinese listed firms are still heavily depend on the more expensive source of financing–bank loans. This finding supports the conclusion drawn in Forsake et al. (2012), and Zou and Xiao (2006) that only a small amount of firms which meet the eligibility tests. However, we found that bank loans have a positive effect on investment efficiency and investment opportunities. This finding supports Cull and Xu's (2005) finding on the relationship between bank loans and reinvestment, and extends existing literature to bank financing and investment efficiency literature. In addition, we found that public equity issues have little impact on firm investment efficiency. However, private equity placements and government subsidies have a positive effect on investment efficiency, while private equity financing is negatively associated with the investment opportunities and government subsidies also do not have a significant impact on investment opportunities. According results, this research provides crucial info to managers, market regulators and investors to be able to enrich effective external financial process along with better capital market in China. Our findings also have important insights for investors and firms, and policy implications for policy-makers and regulators.