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Investment and financing constraints in China: does working capital management make a difference?

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  • Sai Ding
  • Alessandra Guariglia
  • John Knight

Abstract

We use a panel of over 116,000 Chinese firms of different ownership types over the period 2000-2007 to analyze the linkages between investment in fixed and working capital and financing constraints. We find that those firms characterized by high working capital display high sensitivities of investment in working capital to cash flow (WKS) and low sensitivities of investment in fixed capital to cash flow (FKS). We then construct and analyze firm-level FKS and WKS measures and find that, despite severe external financing constraints, those firms with low FKS and high WKS exhibit the highest fixed investment rates. This suggests that good working capital management may help firms to alleviate the effects of financing constraints on fixed investment.

Suggested Citation

  • Sai Ding & Alessandra Guariglia & John Knight, 2011. "Investment and financing constraints in China: does working capital management make a difference?," Discussion Papers 11/06, University of Nottingham, GEP.
    • Handle: RePEc:not:notgep:11/06
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    More about this item

    Keywords

    Investment; Cash flow; Financing constraints; Working capital;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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