Impact On The Investment-Cash Flow Sensitivity Of Listed Companies Under Government Control

With the steadily development of capital markets and the progress of marketization, how to obtain enough capitals to meet the needs of investment and allocate them to appropriate projects are becoming the main problem that the listed companies have to face. Banking financing is the main facility of the fund-raising, with the limit of regulators and the weakness of debt markets. So internally generated cash flows have become more and more important. Meanwhile, how to decrease the cost of fund raising, increase the efficiency of investment and the value of company? What is the difference of investment behavior between government controlled and privately controlled firms?First, this paper demonstrates the background of the topic, then reviews existing domestic and foreign literatures, and make clear the paper’s structure and possible innovations. The second part is a theoretical overview of factors that influent the sensitivity of investment-cash flow sensitivity. The third part illustrates current conditions of capital market and investment characteristics of listed companies in our country. The fourth part deals with the selection of samples and descriptive statistics, then build the regression models. This paper chooses the manufacturing industry listed companies of Shanghai and Shenzhen stock exchanges from 2002 to 2012 as research samples to investigate the investment-cash flow sensitivity. Empirical analysis shows that the relationship between investment and cash flows is U-shaped. Then we find that government controlled listed firms have greater investment-cash flow sensitivity than do privately controlled listed companies, especially on the left-hand side of the U-shaped curve where cash flow is negative. However, the difference in sensitivities appears only among firms that possess few profitable investment opportunities. We attribute this finding to the multiple socio-economic objectives that the governments have, which leads to increased capital expenditures by the firms it controls when internal funds are abundant and when internal funds are negative. Based on the theory and empirical analysis, this paper puts forward some policy advises about improving the capital market and raising efficiency of investment of government controlled firms.