The Relationship between Cash Flows and Investment according to Economic Status

Deng, Jie; Park, A-young; Oh, Gabjin

doi:10.3938/jkps.76.109

Cited by 1 publication

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“…The relationship between firms' sensitivity of investment to cash and financial constraints is an important perspective to consider. Prior literature has studied the characteristics of firm investment (Deng et al, 2020), the relationship between free cash flow and over‐investment (Yeo, 2018) and the impact of quality of financial reporting on constraining investment inefficiency (Balakrishnan et al, 2014; Ramalingegowda et al, 2013). In line with agency theory, these empirical studies feature a simple underling framework: over‐investment tends to occur in firms whose free cash flow is positive.…”

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confidence: 99%

Firm investment and financial autonomy: A transaction cost economics and firm lifecycle approach

2023

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This study examines how firm's investments relate to financial autonomy across different stages of lifecycle. With 1367 Chinese listed companies from 1990 to 2018, the results indicate that firms with high (low) financial autonomy tend to over-invest (under-invest). Accordingly, financially autonomous firms have lower valuation. While corporate governance mitigates both over-and under-investment over time in China, such an effect becomes statistically insignificant after considering different magnitudes of financial autonomy. The Chinese policy makers should consider designing more solid corporate governance to control the opportunism of managers who are more financially independent.

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