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The ownership effect on corporate investment distortion in the transitional economies: Mitigating or exacerbating?

Author

Listed:
  • Ying Wu

    (Salisbury University)

  • Hong Kim Duong

    (Old Dominion University)

  • E. Libin

    (Dongbei University of Finance and Economics)

  • Hong Yao

    (Salisbury University)

Abstract

This article analyzes how asymmetric information in corporate management and equity financing distorts corporate investment and how different corporate ownership (government, managerial, and foreign) affects investment distortion in a transitional economy. When managerial entrenchment is sufficiently high, government ownership further distorts investment by biasing downward managers’ net marginal cost of investment; in contrast, managerial and foreign ownership counter the bias and thereby reduce investment distortion. Furthermore, unlike government ownership, managerial and foreign ownership mitigate rather than exacerbate the extent to which high entrenchment distorts investment. An econometric analysis of a large sample of Chinese public firms provides strong evidence in support of these theoretical predictions.

Suggested Citation

  • Ying Wu & Hong Kim Duong & E. Libin & Hong Yao, 2021. "The ownership effect on corporate investment distortion in the transitional economies: Mitigating or exacerbating?," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 523-555, August.
    • Handle: RePEc:kap:rqfnac:v:57:y:2021:i:2:d:10.1007_s11156-020-00954-1
    DOI: 10.1007/s11156-020-00954-1
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