UC Santa Barbara

In this dissertation, I use data from publicly listed companies to explore factors that affect corporate investment decisions. In Chapter 1, I investigate the sensitive of investment to cash flow. I argue that the sensitivity is partly driven by agency-conflict within stockholders, namely, controlling shareholders extracting firms’ resources at the expenses of minority shareholders. To test this finding, I use the mandatory Split-Share Structure Reform in China, which exogenously converted all non-tradable shares to tradable, and reduced the incentives of controlling shareholders’ expropriation by better aligning the interests of all shareholders. By employing a theoretical model and conducting empirical analysis, I find a significant reduction in the sensitivity for firms with higher levels of pre-reform expropriation, and the effect is more pronounced for private firms. Moreover, I find that manager’s over-investment, financial constraints, and measurement errors in investment opportunities do not drive the reduction in sensitivity. Overall, my findings support the view that controlling shareholders’ expropriation leads to investment-cash flow sensitivity. Given that controlling shareholders’ expropriation is widely prevalent, my findings have broad relevance for explaining investment and financing decisions.

Chapter 2 examines whether investment-cash flow sensitivity is a good measure of financial constraints in emerging markets. We exploit a staggered industrial regulation in China as a natural experiment to identify the impact of increasing financial constraints on the sensitivity. We find that the investment-cash flow sensitivity becomes significantly larger by 7.6% after the enactment of regulation policy in treated industries using a difference-in-differences methodology. Consistent with political favoritism explanations, we show that such a positive association is stronger for state-owned enterprises and more bank-dependent firms, but is smaller under credit easing. The findings empirically suggest that investment-cash flow sensitivity indeed measures financial constraint.

In Chapter 3, I investigate the causality between government intervention and investment efficiency. I use the staggered industrial regulation in Chapter 2 as a policy instrument to changes in government intervention. With a difference-in-differences methodology, I find that investment efficiency becomes significantly larger after the enactment in treated industries. Moreover, I show that the association between higher investment efficiency, measured as increasing investment-Tobin’s Q sensitivity, and decreasing government intervention is stronger for state-owned enterprises. In addition, I argue that for private firms, such association is significantly stronger for those with political connections. My findings empirically suggest that government intervention distorts the efficiency of corporate investment.