Financial Development, Financing Constraints And Ownership

By GMM (Ⅳ) method and forward mean differencing, this paper estimate a structural model based on the Euler equation for investment using a firm-level data which include all of China’s listed manufacturing firms from2002to2011. We start our analysis under the basic framework of the Euler equation model. The Euler equation characterizes a firm’s optimal investment path and relates it to marginal adjustment costs in adjacent periods. A credit constrained firm behaves as if it had a higher discount rate for a given level of today’s adjustment costs. We replace cash flow to cash stock because cash stock is irrelevant to firm’s earning prospect. Furth more, because forward mean-differencing preserves orthogonality between transformed errors and untransformed original variables, we use the GMM procedure, implemented as Ⅳ with-1and-2lags of instruments to overcome the endogeneity problem. Our findings are threefold:Firstly, there is a strong negative relationship between the extent of financial development and the sensitivity of investment to availability of internal funds (a proxy for financing constraints). Thus, this paper provides micro-level evidence that financial development impacts growth by reducing financing constraints and increasing the efficiency of capital allocation.Secondly, firm size does not explain the degree of financial constraints. There are two possible explanations:Firstly, being listed greatly improves financial transparency of the small and medium-sized enterprise. However, for large enterprises, the effect is not obvious. Second, small and medium-sized enterprises effectively expand their financing channels by going public.Tirdly, compared to state-owned firms, private listed firms in china are bearing much more serious credit constrints.Futhermore, financial develpement reducing more finacianl constraints faced by private Chinese firms than state-owned firms. Our finding support "political pecking order hypothesis"-compared to stated owned firms, private firms in china are much harder to get external financial support because of the existing capital market imperfections in China for them.