Investment and Determinants of Investment Cash Flow Sensitivity : Evidence from Privately Listed Chinese Firms

This study examines firm-level capital investment efficiency and the determinants of investment cash flow sensitivity (CFS). Using financial and ultimate ownership structure data from China, we show that privately listed Chinese firms with high accounting quality tend to increase investment expenditures and have underinvestment problems. Previous studies have claimed that a positive relation exists between investment and cash flow in China, but our results do not support high investment-CFS caused by agency costs. By contrast, our results suggest that firms with high investment-CFS may be highly constrained financially. We also find that a negative relation exists between investment opportunity and investment-CFS. In addition, younger firms face higher investment-CFS.