This paper uses a dataset of more than 100,000 firms over the period of 2000-2007 to assess whether and why Chinese firms overinvest. We find that corporate investment is more efficient in the non-state sector. Within all ownership categories, we uncover evidence indicating a degree of overinvestment among firms that invest more than their industry median or more than their predicted optimal investment. The free cash flow hypothesis provides a good explanation for China's overinvestment in the nonstate sectors, whereas in the state sector, overinvestment is attributable to the poor screening and monitoring of enterprises by banks. ARTICLE HISTORY

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What drives a firm's investment decisions in China? While most literature focuses on the role of financial factors (such as cash flow), we explore this most important question in corporate finance from the perspective of economic fundamentals. Using a large number of proxies for investment opportunities and a variety of econometric approaches, our empirical results show that it is private firms that make the most of all types of investment opportunities in China. State-owned enterprises respond more to the investment opportunities from the supply side, but much less so to demand-side shocks and future profitability. Financial sector development is found to be conducive to the improvement of the investment efficiency of private firms by making them take better advantage of all types of investment opportunities in their decision-making. Our research calls for further institutional and financial sector reforms in China.

This paper investigates the impacts of cap-and-trade (CAT) regulation on a three-echelon closed-loop supply chain network (CLSCN) that consists of suppliers, high-emission and low-emission manufacturers, demand markets and carbon trading centers. The presented CLSCN model includes both product trading and carbon trading subnets. Combining variational inequality theory (VI) with complementary theory, we first characterize the optimal conditions for members in each tier first, and then derive that of the entire CLSCN. In addition, we focus on the effects of carbon caps and EOL collection rate target on CLSCN performances with numerical examples. The results reveal that, in some cases, there is a consistency between carbon emission reduction target of the government and the profit target of enterprises. The government should choose reasonable and moderate carbon caps for all the enterprises to balance the CLSCN members’ economic interests, carbon emissions, as well as resources utilization rate. Moreover, the government should not blindly pursue a high collection rate target. The above conclusions can provide practical guidance for governments and enterprises in a CLSCN under CAT regulation.

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