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Article: Investment and the soft budget constraint in China

TitleInvestment and the soft budget constraint in China
Authors
KeywordsInvestment-cash flow sensitivities
Moral hazard
Soft budget constraints
Issue Date2010
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/iref
Citation
International Review Of Economics And Finance, 2010, v. 19 n. 2, p. 219-227 How to Cite?
AbstractThis paper examines the incentive effects of the soft budget constraint on the investment behavior of firms in general and on the investment-cash flow sensitivity in particular. To this end, we develop a simple model of moral hazard that takes the soft budget constraint into account. Within this moral hazard environment, we show that investment is positively related to the amount of internal funds. We further show that the presence of the soft budget constraint deteriorates the moral hazard problem, thereby making the investment level less sensitive to the amount of internal funds. This is the case irrespective of whether the soft budget constraint renders the firm more or less liquidity constrained. To test the model's empirical implications, we employ data of China's listed companies for the period from 1997 to 2003. We use the share of state ownership as a proxy for the severity of the soft budget constraint. We find strong evidence that firms with larger shares of state ownership exhibit lower investment-cash flow sensitivities than firms with smaller shares of state ownership. © 2009 Elsevier Inc. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/85660
ISSN
2015 Impact Factor: 1.846
2015 SCImago Journal Rankings: 0.890
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorChow, CKWen_HK
dc.contributor.authorSong, FMen_HK
dc.contributor.authorWong, KPen_HK
dc.date.accessioned2010-09-06T09:07:43Z-
dc.date.available2010-09-06T09:07:43Z-
dc.date.issued2010en_HK
dc.identifier.citationInternational Review Of Economics And Finance, 2010, v. 19 n. 2, p. 219-227en_HK
dc.identifier.issn1059-0560en_HK
dc.identifier.urihttp://hdl.handle.net/10722/85660-
dc.description.abstractThis paper examines the incentive effects of the soft budget constraint on the investment behavior of firms in general and on the investment-cash flow sensitivity in particular. To this end, we develop a simple model of moral hazard that takes the soft budget constraint into account. Within this moral hazard environment, we show that investment is positively related to the amount of internal funds. We further show that the presence of the soft budget constraint deteriorates the moral hazard problem, thereby making the investment level less sensitive to the amount of internal funds. This is the case irrespective of whether the soft budget constraint renders the firm more or less liquidity constrained. To test the model's empirical implications, we employ data of China's listed companies for the period from 1997 to 2003. We use the share of state ownership as a proxy for the severity of the soft budget constraint. We find strong evidence that firms with larger shares of state ownership exhibit lower investment-cash flow sensitivities than firms with smaller shares of state ownership. © 2009 Elsevier Inc. All rights reserved.en_HK
dc.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/irefen_HK
dc.relation.ispartofInternational Review of Economics and Financeen_HK
dc.subjectInvestment-cash flow sensitivitiesen_HK
dc.subjectMoral hazarden_HK
dc.subjectSoft budget constraintsen_HK
dc.titleInvestment and the soft budget constraint in Chinaen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=1059-0560&volume=19&issue=2&spage=219&epage=227&date=2010&atitle=Investment+and+the+soft+budget+constraint+in+Chinaen_HK
dc.identifier.emailSong, FM: fmsong@hkucc.hku.hken_HK
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_HK
dc.identifier.authoritySong, FM=rp01095en_HK
dc.identifier.authorityWong, KP=rp01112en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1016/j.iref.2009.10.003en_HK
dc.identifier.scopuseid_2-s2.0-75149159100en_HK
dc.identifier.hkuros168817en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-75149159100&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume19en_HK
dc.identifier.issue2en_HK
dc.identifier.spage219en_HK
dc.identifier.epage227en_HK
dc.identifier.isiWOS:000275139200006-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridChow, CKW=7402578512en_HK
dc.identifier.scopusauthoridSong, FM=7203075605en_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK
dc.identifier.citeulike5924406-

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