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Capital misallocation in Chinese industrial firms

Author

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  • Le Tang
  • Jun Zhang
  • Jim Huangnan Shen

Abstract

This paper investigates the impact of volatility in profitability shock, capital price distortion and adjustment costs on capital misallocation among Chinese industrial firms. We estimate a dynamic model pertaining firms' investment decision, incorporating institutional differences between state and private firms, so the model can reproduce salient features observed from Chinese firms. Our analysis shows: (i) capital price distortion is more severe among state firms than private ones; (ii) adjusting capital is more costly for state than private firms; (iii) volatility in profitability shock is a major source that causes capital misallocation for both types of firms.

Suggested Citation

  • Le Tang & Jun Zhang & Jim Huangnan Shen, 2024. "Capital misallocation in Chinese industrial firms," Scottish Journal of Political Economy, Scottish Economic Society, vol. 71(1), pages 75-100, February.
    • Handle: RePEc:bla:scotjp:v:71:y:2024:i:1:p:75-100
    DOI: 10.1111/sjpe.12354
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