Corporate Investment Efficiency Research Articles

Board diversity and corporate investment efficiency in emerging markets: an explanation based on principal-agent theory and resource dependence theory

ABSTRACT Using a sample of Chinese listed enterprises over the 2010–2020 period, this study examines and empirically tests the impact of board diversity on inefficient investment. Drawing on principal-agent theory and resource dependence theory, the analysis is conducted within a comprehensive framework. The study provides evidence that board diversity plays a crucial role in mitigating inefficient investment in enterprises by effectively restraining both overinvestment and underinvestment. Mechanism tests indicate that under conditions of high agency costs and high financing constraints, board diversity exerts a stronger inhibitory effect on inefficient investment. Cross-sectional tests show that the impact of board diversity on inefficient investment varies under different ownership properties, firm sizes and levels of marketization. By comprehensively considering multiple characteristics of board diversity, this research fills the research gap and expands the perspectives on inefficient investment in enterprises. It provides valuable insights for shareholders and enterprises on effectively structuring their boards of directors.

Functional subsidies, selective subsidies and corporate investment efficiency: Evidence from China

We investigate the relationship between functional subsidies, selective subsidies, and investment efficiency through meticulous compilation of information on government subsidies, and the implementation of an innovative categorization methodology based on the nature and timing of funds (ex-ante versus ex-post). Our findings suggest that the effects of subsidies exhibit asymmetry by alleviating underinvestment while exacerbating overinvestment, and functional subsidies exert a stronger influence compared to selective subsidies. Financial constraints are found to serve as the major mechanism, and firms with easier access to financing may not effectively utilize subsidies, while those facing severe financial constraints are less prone to misusing them.

Site Visits and Corporate Investment Efficiency

Site Visits and Corporate Investment Efficiency

Big data application and corporate investment decisions: Evidence from A-share listed companies in China

Based on a natural language processing (NLP) method and annual reports from A-share listed companies in China from 2011 to 2020, this paper constructs a big data index for the corporate level and studies the impact of big data on corporate investment decisions. The study finds that big data significantly improves corporate investment decisions. From the perspective of index decomposition, data mining and mobile service are found to significantly improve corporate investment efficiency, while algorithm development and intelligent manufacturing mainly enhance the corporate investment level. The study also notes that heterogeneity may exist due to differences in financial, innovation, and legal environments. In terms of mechanisms, big data can positively influence corporate investment decisions by improving R&D investment and reducing transaction costs.

Pension insurance contribution rate and corporate investment efficiency

This study identifies the pension insurance contribution rate as an important factor affecting corporate investment efficiency. Empirical research findings reveal a significant crowding-out effect between the pension insurance contribution rate and corporate investment efficiency. That is, the higher the pension insurance contribution rate, the more pronounced the crowding-out effect on corporate investment efficiency. Further analysis of heterogeneity indicates that the crowding-out effect of the pension insurance contribution rate on corporate investment efficiency is more pronounced in non-state-owned enterprises and in enterprises with higher financing constraints.

From apathy to activism: Shareholder dissent on director's pay proposals and board effectiveness

Using a hand-collected dataset of shareholder voting on 10,805 director compensation proposals at general shareholder meetings of Chinese listed firms from 2010 to 2019, we provide novel empirical evidence on board reactions to shareholder dissent. We find that boards of directors facing shareholder dissent significantly improve their monitoring and advising effectiveness. Specifically, they reduce the likelihood of financial restatements, improve CEO performance-turnover sensitivity, and improve corporate investment efficiency. Our findings are robust to propensity score matching, instrumental variable estimation and the exogenous shock of mandatory online voting. Moreover, independent directors facing dissent are more likely to vote against board proposals and to reduce their absences from board meetings. The mechanism analysis shows that shareholder dissent operates through the reputation concern and market signal channels. The effect of dissent is more prominent for non-SOEs, for firms with more high-profile directors, and for firms with less powerful CEOs. Besides, the improved board effectiveness induced by shareholder dissent leads to better firm performance. Overall, our findings highlight the role of shareholder voting in emerging markets with concentrated ownership and weak investor protection.

The effect of superstitious beliefs on corporate investment efficiency: evidence from China

This study investigates the effect of CEOs' cultural-specific superstitious beliefs on corporate investment efficiency in China. Using data collected from Chinese listed firms from 2008 to 2021, we find that CEOs' beliefs about certain years in the zodiac year limit risk-taking behavior and thus mitigate overinvestment but aggravate underinvestment. Specifically, our findings reveal that superstitious beliefs of the zodiac impact corporate investment efficiency in two directions. For firms already in a state of overinvestment, CEOs' decision not to invest for fear of loss due to their superstitious belief of the zodiac year balances that firm's investment level, yielding a positive effect on corporate investment efficiency. However, in the case of firms that were already in a state of underinvestment, CEOs' risk-avert attitudes due to the same beliefs exacerbate underinvestment. Further, our findings show the effect of such beliefs are stronger in firms with a lower level of marketization, weaker internal control, and less external monitoring. Our findings shed light on the effect of Chinese traditional cultural factors on corporate decision making in emerging economies.

The impact of blockchain adoption on corporate investment efficiency

This study investigates the impact of blockchain technology adoption on corporate investment efficiency. Utilizing a difference-in-differences methodology on an international sample of Forbes Global 2000 companies between 2012 and 2021, we find that firms implementing blockchain exhibit significantly higher investment efficiency post-adoption compared to non-adopters. This effect is more pronounced among ex ante informationally opaque firms. Our results suggest that blockchain adoption reduces overinvesting activities by restricting avenues for managerial discretion through enhanced transparency. Our findings contribute to the growing literature on blockchain's real economic impacts and inform blockchain adoption decisions by demonstrating investment efficiency benefits.

Political governance and corporate investment efficiency in China

ABSTRACT The involvement of the Communist Party of China (CPC) in corporate decision-making has formed a governance model with ‘Chinese characteristics’ that diverges from commonly studied governance models. This paper provides direct insight into China’s political governance model by examining how the Party organization influences the investment efficiency of private firms. We find that increasing the proportion of Party directors (i.e. stronger political governance) improves the investment efficiency of private firms. This finding survives various robustness checks. The mediation analysis suggests that Party organizations promote corporate investment efficiency by playing advisory and supervisory roles in corporate governance. One policy implication is that, from the perspective of improving investment efficiency, the CPC should encourage private firms to invite more Party organization members to the board of directors, supervisory board, or management.

An Empirical Study on the Short-term Impact of the Environmental Protection Fee-to-Tax Reform on Corporate Investment Efficiency

This paper uses non-financial A-share listed companies in China from 2010 to 2020 as research samples, utilizing the quasi-natural experiment conducted through the implementation of the "Environmental Protection Tax Law". The study investigates the short-term impact of the environmental protection fee-to-tax policy on corporate investment efficiency using a generalized difference-in-differences approach. The results indicate that the implementation of the environmental protection fee-to-tax policy significantly suppresses corporate investment efficiency in the short term and increases firms' inefficient investment. Furthermore, it is found that the policy exacerbates the problem of corporate overinvestment, whereas its impact on underinvestment is not significant. After conducting robustness tests by substituting the dependent variables, the conclusion remains valid. Subsequent heterogeneity analysis was conducted, differentiating between state-owned controlling enterprises and non-state-owned controlling enterprises based on the proportion of state capital, compared to state-owned controlling enterprises, the impact of the policy is more significant on non-state-owned controlling enterprises; Additionally, the policy effects across different economic regions of China were analyzed, revealing that the policy's effect is most significant in the eastern region, significant in the western region, but not significant in the central region. The conclusions of this study further enrich the empirical evidence of the micro-effects of environmental regulation, extending the research on the effects of the environmental fee-to-tax policy, and also provide suggestions for policymakers to formulate effective market-incentive-based environmental regulatory policies.

Digital financial inclusion and corporate investment efficiency: Evidence from small‐ and medium‐sized enterprises in China

AbstractThis study investigates the influence of digital financial inclusion (DFI) on the investment efficiency of small‐ and medium‐sized enterprises (SMEs) in China. Employing a dataset of listed National Equities Exchange and Quotations firms over the period from 2011 to 2020, we find robust evidence that the development of DFI improves the investment efficiency of underinvested SMEs. However, no such effect is observed for overinvested SMEs. The mechanism analysis indicates that DFI can mitigate the underinvestment problem of SMEs by restraining their risk‐taking behaviors and easing their financial constraints. Furthermore, we find that the positive effect of DFI on underinvestment is more pronounced for SMEs with weaker financial statuses or in less competitive industries.

Fintech development and corporate credit risk: Evidence from an emerging market

This paper analyzes the impact of fintech development on the credit risk of non-financial firms. Using the city-level fintech development index constructed based on data from Ant Finance Service Group, we find that: (1) non-financial firms in cities with better fintech services have lower credit risk; (2) two channels identified are financial constraints and corporate investment efficiency; (3) the role of fintech development in reducing corporate credit risk are more pronounced for non-state-owned firms, small and medium-sized firms, firms in regions with a lower level of marketization, and firms experiencing economic contraction. Our research provides implications for the development of fintech in an emerging market.

Economic Policy Uncertainty and Corporate Investment Efficiency: Evidence from Australian Energy Companies

This study examines the impact of Economic Policy Uncertainty (EPU) on corporate investment efficiency. I argue that EPU increases financing constraints or induces firms to postpone investment projects, thereby reducing their investment efficiency. Using a data set of Australian energy firms from 2010 to 2022 and the EPU index of Australia, the findings show that the EPU index has a significant and negative effect on corporate investment efficiency. The results hold in fixed-effects and dynamic GMM models and after control for firm-specific factors, suggesting that a macroeconomic factor like the EPU index also plays an important role in determining the efficiency of Australian energy companies’ investments.

Investor–firm interactions and corporate investment efficiency: Evidence from China

Using a sample of A-listed companies from 2010 to 2020, this paper investigates how investor–firm interactions on Easy Interaction and E-interaction affect corporate investment efficiency measured as investment-to-Tobin's Q sensitivity. The empirical results show that investor–firm interactions are positively correlated with corporate investment efficiency. Possible economic channels include information asymmetry and corporate governance channels. Moreover, investor–firm interactions have a greater impact on firms with fewer financial constraints, higher stock price efficiency, higher media coverage, and higher analyst coverage. When interaction sentiment is more positive, interaction quality is higher, and the topic pertains to technology research and development, the impact of investor–firm interactions is also more pronounced. The main conclusion still holds after adopting a series of endogeneity tests and robustness tests.

Accounting Comparability, ESG Reputational Risk and Corporate Investment Efficiency

Accounting Comparability, ESG Reputational Risk and Corporate Investment Efficiency

Oil price uncertainty and corporate inefficient investment: Evidence from China

Motivated by the substantial influence of oil price uncertainty (OPU) on corporate investment and the importance of corporate investment efficiency, this study focuses on the impact of OPU on corporate inefficient investment. Using a sample of Chinese listed firms from 2007 to 2019, we find that OPU negatively affects inefficient investment. This negative effect is consistent in the over-investment and under-investment sub-sample. Our findings are consistent with the real options theory and the strategic growth option theory. We also find that a shortening debt maturity structure is one of the underlying mechanisms through which OPU reduces inefficient investment. In addition, heterogeneity analysis indicates that the negative effects of OPU on inefficient investment are more pronounced in state-owned firms, firms with higher financing constraints, and firms with lower ownership concentration. Furthermore, we find that OPU emanating from positive oil price changes has a stronger negative impact on inefficient investment. This study comprehensively investigates the relationship between OPU and corporate inefficient investment from perspectives of over-investment and under-investment, and it enriches macro perspective evidence for the determinants of corporate inefficient investment.

Selective industrial policy and overcapacity: Evidence from a quasi-natural experiment in China

Overcapacity has long been a "chronic problem affecting China's economic development." Why is China's overcapacity intractable? This study takes the "Revitalization Plans of Ten Industries" (the RPTI) issued by the Chinese government in 2009 as a quasi-natural experiment. It deploys the data of China's A-share listed enterprises and the difference-in-differences (DID) model to investigate the impact of the selective industrial policy on enterprise overcapacity. The results show that the policy has a significant and persistently negative effect on the capacity utilization rate of the treated group. Mechanistic studies reveal that policy-induced overcapacity is caused by increasing government subsidies for the treated group, depressing corporate investment efficiency, and growing capital misallocation. After considering zombie enterprises, we find that the policy mainly leads to the overcapacity of regular enterprises but has no negative impact on zombie enterprises, and zombie enterprises crowd out the capacity utilization rate of regular enterprises in the same industry. This study indicates that a selective industrial policy that prevents the market elimination mechanism from functioning is an underlying cause of overcapacity in China. The study's findings reveal why the administrative de-capacity policies enacted by the Chinese government have failed to eliminate backward capacity but rather created a new overcapacity issue.

ESG performance and investment efficiency: The impact of information asymmetry

This paper investigates the relationship between firms' engagement in environmental, social, and governance (ESG) activities and corporate investment efficiency, using 1,094 firms from 21 countries in Europe, covering the years 2002–2019. We conduct our estimations using fixed effects panel data techniques and address potential endogeneity with instrumental variables (IV) estimations. We provide evidence that overall ESG engagement is positively and significantly associated with investment efficiency. Analyzing overinvestment and underinvestment scenarios shows that ESG engagement decreases only overinvestment problems. Within the underinvestment scenario, we observe that ESG engagement is beneficial only for firms with higher information asymmetries. Thus, information asymmetry matters in the underinvestment case. We next show that four firm-level channels—information asymmetry, financial constraints, cash flows, and risk—link ESG performance to investment inefficiency. Additional analysis shows that firms with extreme ESG scores (i.e., very low and very high) do not experience significant reductions in investment inefficiency. Altogether, our findings draw attention to the critical role of ESG performance and information asymmetry in determining corporate investment efficiency.

Digitalization and corporate investment efficiency: Evidence from China

We study whether digitalization improves investment efficiency using a sample of 3056 listed enterprises in China from 2007 to 2020. We adopt textual analysis to measure corporate digitalization, and preliminary tests verify the validity of our text-based indicators of digitalization. Our baseline results suggest that companies embracing digitalization exhibit lower instances of both underinvestment and overinvestment. We verify the robustness of our findings using diverse methods, including the Instrumental Variable (IV) method, Difference-in-Differences (DID) method, placebo test, and Propensity Score Matching (PSM) method. Cross-sectional analysis demonstrates an asymmetrical impact of digitalization on investment efficiency. Corporate digitalization is more effective in reducing underinvestment for small enterprises, non-state-owned enterprises, and enterprises in cities with low fiscal constraints. Enterprises with high agency costs, as well as manufacturers specializing in consumer products, derive greater benefits from a reduction in overinvestment. Mechanism analysis confirms that corporate digitalization can mitigate overinvestment by correcting managerial expectations and agency behaviors. Simultaneously, it alleviates underinvestment by diminishing the financing frictions of corporations. Our findings offer a novel perspective on how digitalization can endow companies with competitive advantages.

International evidence on the monitoring role of foreign institutional investors in corporate investment efficiency

PurposeThis study examines whether and how the legal origin of foreign institutional investors (FIIs) impacts corporate investment efficiency.Design/methodology/approachThe study employs a large panel dataset of firms from 32 non-USA countries from 2005 to 2018. Financial and institutional ownership data are obtained from the COMPUSTAT Global and Public Ownership databases in S&P Capital IQ, respectively. The study employed ordinary least squares (OLS) regression with year and firm fixed effects. In addition, two-stage least squares with instrumental variable regression (2SLS-IV) and propensity score matching (PSM) approaches were employed to address the potential endogeneity.FindingsThe findings of this study suggest that common- and civil-law FIIs differ in their monitoring capabilities to promote investment efficiency. The authors find evidence that increased equity ownership by common-law FIIs, not civil-law investors, strengthens the investment-Q sensitivity, resulting in higher investment efficiency. Consistent with the monitoring and information channel, the results further indicate that the positive impact of common-law FIIs on investment efficiency is stronger in host environments susceptible to agency conflicts and information asymmetry.Originality/valueThis study offers novel evidence on the heterogeneous monitoring role of FIIs with regard to their home countries' legal origins and their impact on investment efficiency in an international context.