IDEAS home Printed from https://ideas.repec.org/a/sae/sagope/v9y2019i4p2158244019885146.html
   My bibliography  Save this article

Causal Relation Between Stock Market Performance and Firm Investment in China: Mediating Role of Information Asymmetry

Author

Listed:
  • Ghulam Hussain Khan Zaigham
  • Xiangning Wang
  • Haji Suleman Ali

Abstract

The main objectives of this study are to examine the impact of stock price performance on firm’s investment and to investigate the counter impact of changes in investment expenditures on stock price performance. The random effects model was applied on the panel data of Chinese manufacturing firms listed at the Shanghai Stock Exchange and the Shenzhen Stock Exchange during the period 2002 to 2016. The sample contains 398 firms with 5,970 observations. Although there is a statistically significant and negative relationship between stock price and investment expenditures, the impact of stock price on investment expenditures is far greater than that of investment expenditures on stock price. Information asymmetry positively mediates both investment sensitivity to stock prices and stock prices sensitivity to investment. This study is a valuable contribution toward the analysis of investment decision making by manufacturing firms in China. It also provides guidelines for investors to assess the informational status of the capital market before making investment decisions and to comprehensively understand the different decisions made by firms with regard to the issue of new stocks and the indirect information attached with such issues.

Suggested Citation

  • Ghulam Hussain Khan Zaigham & Xiangning Wang & Haji Suleman Ali, 2019. "Causal Relation Between Stock Market Performance and Firm Investment in China: Mediating Role of Information Asymmetry," SAGE Open, , vol. 9(4), pages 21582440198, October.
    • Handle: RePEc:sae:sagope:v:9:y:2019:i:4:p:2158244019885146
    DOI: 10.1177/2158244019885146
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/2158244019885146
    Download Restriction: no
    File URL: https://libkey.io/10.1177/2158244019885146?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Steven N. Kaplan & Luigi Zingales, 1995. "Do Financing Constraints Explain Why Investment is Correlated with Cash Flow?," NBER Working Papers 5267, National Bureau of Economic Research, Inc.
    2. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2003. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(3), pages 969-1005.
    3. Yaron Leitner, 2007. "Stock prices and business investment," Business Review, Federal Reserve Bank of Philadelphia, issue Q4.
    4. Steven M. Fazzari & Anna Maria Variato, 1994. "Asymmetric Information and Keynesian Theories of Investment," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 16(3), pages 351-370, March.
    5. Ozkan, Aydin & Ozkan, Neslihan, 2004. "Corporate cash holdings: An empirical investigation of UK companies," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2103-2134, September.
    6. Thierry Foucault & Laurent Fresard, 2019. "Corporate Strategy, Conformism, and the Stock Market," The Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 905-950.
    7. Cleary, Sean & Povel, Paul & Raith, Michael, 2007. "The U-Shaped Investment Curve: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(1), pages 1-39, March.
    8. Gilchrist, Simon & Himmelberg, Charles P. & Huberman, Gur, 2005. "Do stock price bubbles influence corporate investment?," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 805-827, May.
    9. repec:bla:obuest:v:62:y:2000:i:2:p:267-92 is not listed on IDEAS
    10. Robert M. Bushman & Abbie Smith, 2003. "Transparency, financial accounting information, and corporate governance," Economic Policy Review, Federal Reserve Bank of New York, vol. 9(Apr), pages 65-87.
    11. repec:bla:jfinan:v:59:y:2004:i:5:p:2061-2092 is not listed on IDEAS
    12. Shibata, Takashi & Nishihara, Michi, 2011. "Interactions between investment timing and management effort under asymmetric information: Costs and benefits of privatized firms," European Journal of Operational Research, Elsevier, vol. 215(3), pages 688-696, December.
    13. Lang, Larry & Ofek, Eli & Stulz, Rene M., 1996. "Leverage, investment, and firm growth," Journal of Financial Economics, Elsevier, vol. 40(1), pages 3-29, January.
    14. Steven M. Fazzari & Anna Maria Variato, 1994. "Asymmetric Information and Keynesian Theories of Investment," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 16(3), pages 351-369, April.
    15. Harris, Lawrence E, 1994. "Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes," The Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 149-178.
    16. R. Glenn Hubbard & Anil K. Kashyap & Toni M. Whited, 1993. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
    17. Chowdhury, Jaideep & Kumar, Raman & Shome, Dilip, 2016. "Investment–cash flow sensitivity under changing information asymmetry," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 28-40.
    18. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    19. Belleflamme, Paul & Peitz, Martin, 2014. "Asymmetric information and overinvestment in quality," European Economic Review, Elsevier, vol. 66(C), pages 127-143.
    20. Bialowolski, Piotr & Weziak-Bialowolska, Dorota, 2014. "External factors affecting investment decisions of companies," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-21.
    21. Arslan, Ozgur & Florackis, Chrisostomos & Ozkan, Aydin, 2006. "The role of cash holdings in reducing investment-cash flow sensitivity: Evidence from a financial crisis period in an emerging market," Emerging Markets Review, Elsevier, vol. 7(4), pages 320-338, December.
    22. Olivier Blanchard & Changyong Rhee & Lawrence Summers, 1993. "The Stock Market, Profit, and Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(1), pages 115-136.
    23. Aydoḡan Alti, 2003. "How Sensitive Is Investment to Cash Flow When Financing Is Frictionless?," Journal of Finance, American Finance Association, vol. 58(2), pages 707-722, April.
    24. Ascioglu, Asli & Hegde, Shantaram P. & McDermott, John B., 2008. "Information asymmetry and investment-cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1036-1048, June.
    25. Mufaddal Baxamusa & Sunil Mohanty & Ramesh P. Rao, 2015. "Information Asymmetry about Investment Risk and Financing Choice," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(7-8), pages 947-964, September.
    26. M. J. Athey & W. D. Reeser, 2000. "Asymmetric Information, Industrial Policy, and Corporate Investment in India," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(2), pages 267-292, May.
    27. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    28. Ağca, Şenay & Mozumdar, Abon, 2017. "Investment–Cash Flow Sensitivity: Fact or Fiction?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(3), pages 1111-1141, June.
    29. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
    30. Kewei Hou & Tobias J. Moskowitz, 2005. "Market Frictions, Price Delay, and the Cross-Section of Expected Returns," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 981-1020.
    31. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(1), pages 33-60.
    32. Fazzari, Steven M & Athey, Michael J, 1987. "Asymmetric Information, Financing Constraints, and Investment," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 481-487, August.
    33. Kouser, Rehana & Saba, Irum & Anjum, Farah, 2016. "Impact of Asymmetric Information on the Investment Sensitivity to Stock Price and the Stock Price Sensitivity to Investment," Journal of Accounting and Finance in Emerging Economies, CSRC Publishing, Center for Sustainability Research and Consultancy Pakistan, vol. 2(1), pages 1-16, June.
    34. Praveen Kumar & Dongmei Li, 2016. "Capital Investment, Innovative Capacity, and Stock Returns," Journal of Finance, American Finance Association, vol. 71(5), pages 2059-2094, October.
    35. Assogbavi, T. & Khoury, N. & Yourougou, P., 1995. "Short interest and the asymmetry of the price-volume relationship in the Canadian stock market," Journal of Banking & Finance, Elsevier, vol. 19(8), pages 1341-1358, November.
    36. Olivier Dessaint & Thierry Foucault & Laurent Frésard & Adrien Matray, 2019. "Noisy Stock Prices and Corporate Investment," The Review of Financial Studies, Society for Financial Studies, vol. 32(7), pages 2625-2672.
    37. Shih‐Chuan Tsai, 2008. "Information Asymmetry and Corporate Investment Decisions: A Dynamic Approach," The Financial Review, Eastern Finance Association, vol. 43(2), pages 241-271, May.
    38. Dongmin Kong & Tusheng Xiao & Shasha Liu, 2010. "Asymmetric information, firm investment and stock prices," China Finance Review International, Emerald Group Publishing, vol. 1(1), pages 6-33, October.
    39. Jinlan Ni & Deepak Khazanchi, 2009. "Information Technology Investment Decisions Under Asymmetric Information: A Modified Rational Expectation Model," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 55-72.
    40. Chaney, Paul K. & Lewis, Craig M., 1995. "Earnings management and firm valuation under asymmetric information," Journal of Corporate Finance, Elsevier, vol. 1(3-4), pages 319-345, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xu, Weidong & Luo, Zijun & Li, Donghui, 2024. "Investor–firm interactions and corporate investment efficiency: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 84(C).
    2. Sana Saleem & Muhammad Usman & Muhammad Naveed Akhtar, 2023. "Does Private Information Always Hurt Retail Investors? The Impact of Private Information on Cost of Equity: Moderating Role of Investment Adjustment," SAGE Open, , vol. 13(4), pages 21582440231, November.
    3. Mawih Kareem AL Ani & Kavita Chavali, 2023. "The relationship between investment intensity and profitability measures from the perspective of foreign investors," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-11, December.
    4. Leo Vashkor Dewri, 2022. "A Critical Assessment of Interrelationship Among Corporate Governance, Financial Performance, Refined Economic Value Added to Measure Firm Value and Return on Stock," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(4), pages 2718-2759, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brown, James R. & Petersen, Bruce C., 2009. "Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 971-984, May.
    2. Gaurav Gupta & Jitendra Mahakud, 2019. "Alternative measure of financial development and investment-cash flow sensitivity: evidence from an emerging economy," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-28, December.
    3. Sapienza, Paola & Polk, Christopher, 2003. "The Real Effects of Investor Sentiment," CEPR Discussion Papers 3826, C.E.P.R. Discussion Papers.
    4. Ahmad, Muhammad Munir & Hunjra, Ahmed Imran & Taskin, Dilvin, 2023. "Do asymmetric information and leverage affect investment decisions?," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 337-345.
    5. Черкасова Виктория Артуровна & Дуняшева Регина Фаритовна, 2016. "Инвестиционные Решения Компаний В Условиях Асимметрии Информации," Higher School of Economics Economic Journal Экономический журнал Высшей школы экономики, CyberLeninka;Федеральное государственное автономное образовательное учреждение высшего образования «Национальный исследовательский университет «Высшая школа экономики», vol. 20(4), pages 655-690.
    6. Serin Choi & Seoki Lee & Kyuwan Choi & Kyung-A Sun, 2018. "Investment–cash flow sensitivities of restaurant firms," Tourism Economics, , vol. 24(5), pages 560-575, August.
    7. Gayané Hovakimian, 2009. "Determinants of Investment Cash Flow Sensitivity," Financial Management, Financial Management Association International, vol. 38(1), pages 161-183, March.
    8. Pereira da Silva, Paulo, 2021. "Do managers pay attention to the market? A review of the relationship between stock price informativeness and investment," Journal of Multinational Financial Management, Elsevier, vol. 59(C).
    9. Lyandres, Evgeny, 2007. "Costly external financing, investment timing, and investment-cash flow sensitivity," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 959-980, December.
    10. Antonio E. Bernardo & Hongbin Cai & Jiang Luo, 2016. "Earnings vs. stock-price based incentives in managerial compensation contracts," Review of Accounting Studies, Springer, vol. 21(1), pages 316-348, March.
    11. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.
    12. Kwanglim Seo & Jungtae Soh & Amit Sharma, 2018. "Do financial constraints affect the sensitivity of investment to cash flow? New evidence from franchised restaurant firms," Tourism Economics, , vol. 24(6), pages 645-661, September.
    13. Emmanuel Adu‐Ameyaw & Albert Danso & Moshfique Uddin & Samuel Acheampong, 2024. "Investment‐cash flow sensitivity: Evidence from investment in identifiable intangible and tangible assets activities," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1179-1204, April.
    14. Xin Qu & Majella Percy & Fang Hu & Jenny Stewart, 2022. "Can CEO equity‐based compensation limit investment‐related agency problems?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2579-2614, June.
    15. Mundaca, Gabriela, 2008. "“Corporate investment, cash flow level and market imperfections”," MPRA Paper 20502, University Library of Munich, Germany, revised 16 Aug 2009.
    16. Liu, Jia, 2013. "Fixed investment, liquidity, and access to capital markets: New evidence," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 189-201.
    17. Vidhan K. Goyal & Takeshi Yamada, 2004. "Asset Price Shocks, Financial Constraints, and Investment: Evidence from Japan," The Journal of Business, University of Chicago Press, vol. 77(1), pages 175-200, January.
    18. Degryse, Hans & de Jong, Abe, 2006. "Investment and internal finance: Asymmetric information or managerial discretion?," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 125-147, January.
    19. Shushu Liao & Marco Errico, 2023. "Corporate investment and stock market valuation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 795-819, March.
    20. Gaurav Gupta & Jitendra Mahakud & Vivek Verma, 2020. "CEO's education and investment–cash flow sensitivity: an empirical investigation," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 17(4), pages 589-618, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:sagope:v:9:y:2019:i:4:p:2158244019885146. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.