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The effect of banking system reform on investment–cash flow sensitivity: Evidence from China

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  • Tsai, Ying-Ju
  • Chen, Yi-Pei
  • Lin, Chi-Ling
  • Hung, Jung-Hua

Abstract

This study investigates the effect of banking system reform on the investment behavior of Chinese listed firms. We find that the politically-oriented investment problem for state-controlled listed companies is mitigated by the reform due to foreign participation in the management of Chinese banks. The problem of underinvestment in non-state-controlled listed companies also appears to be alleviated due to an increase of bank loans. We include leverage in our analysis and the main findings are robust. The results provide evidence that Chinese banking system reform has increased the efficiency of resource allocation, easing investment distortions in state-controlled listed companies and reducing financial constraints in non-state-controlled listed companies.

Suggested Citation

  • Tsai, Ying-Ju & Chen, Yi-Pei & Lin, Chi-Ling & Hung, Jung-Hua, 2014. "The effect of banking system reform on investment–cash flow sensitivity: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 166-176.
    • Handle: RePEc:eee:jbfina:v:46:y:2014:i:c:p:166-176
    DOI: 10.1016/j.jbankfin.2014.04.022
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    More about this item

    Keywords

    Banking system reform; Investment–cash flow sensitivity; Financial constraints; China;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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