Corporate Investment Efficiency Research Articles

Does climate policy uncertainty impair or improve corporate investment efficiency?

Climate policy uncertainty (CPU) has been a topical issue given its widespread impacts, but its effect on corporate investment efficiency is arguable. Based on a sample of Chinese listed firms, we find that higher CPU results in lower investment levels while higher investment sensitivity to investment opportunities. This suggests that CPU improves investment efficiency by pushing firms to reduce investment expenditures and align their investment decisions more in line with investment opportunities. We name this finding as the pushback effect of CPU and find that it is more pronounced for firms with overinvestment or tight financial conditions.

The Relationship Between Chief Financial Officer Gender and Investment Efficiency

Objective: This study aims to examine the relationship between the gender of the chief financial officer (CFO) and the efficiency of corporate investment, especially over-investment. Methods: The independent variable is the gender of the CFO and the dependent variable is over-investment. The research method is correlation type and multivariate regression using panel data with a logistic regression model approach. The data of manufacturing companies in the Tehran Stock Exchange has been collected from 2017 to 2021. Results: The findings of the research show that the presence of a female financial manager is significantly related to the reduction of the company's over-investment level, so gender plays a role in the economic decision-making and investment of companies. Conclusion: Female chief financial managers are more risk-averse compared to male chief financial managers and consider the interests of shareholders in the company’s economic decisions. Therefore, companies should pay special attention to gender diversity at the level of company managers in making decisions and economic investments.

Accruals quality and efficient investing: Cross-country evidence

This study examines whether the effect of firm-level financial reporting quality − measured in the form of the quality of accruals − on corporate investment efficiency differs across jurisdictions with different strengths of institutional and regulatory enforcement. Institutional enforcement effectiveness relates to operating in jurisdictions with lower vs. higher informational uncertainty about actual firm performance, and where institutions secure the correct function of markets, with limited concerns about the extraction of any unlawful benefits by insiders. This effectiveness should mitigate adverse selection and moral hazard concerns driving inefficient investment, in the way that firm-specific financial reporting quality has been shown to do within single-country settings. Using a sample from 25 countries, accruals quality is positively associated with efficient investing, regardless of any country-level institutional characteristics. This association becomes more pronounced when the country-level strength of institutional enforcement is weaker, consistent with firm-specific reporting quality increasing in importance when country level institutional enforcement worsens. This evidence indicates that, when the effectiveness of institutional enforcement in a country does not successfully alleviate information asymmetries or secure efficient monitoring of corporate insiders by capital providers, there is greater need for firm-specific accounting quality to perform this function and promote efficient firm-level investing.

Establishment of environmental courts and corporate green innovation

In this study, we empirically examine the impact of establishing environmental courts on corporate green innovation and further explore the underlying channels driving our findings. Using A-share listed firms in China's stock markets from 2008 to 2022, we show that the establishment of environmental courts is positively correlated with corporate green innovation and corporate investment efficiency can partially mediate this above relationship. Overall, our results provide clear policy implications for institutional design and firm practices on green activities.

Impact of Internal Control and Audit Quality on Corporate Investment Efficiency - Focus on Chinese Listed Companies

Impact of Internal Control and Audit Quality on Corporate Investment Efficiency - Focus on Chinese Listed Companies

Debt maturity, governance and investment efficiency: new evidence from emerging market

PurposeThis study investigates the combined influence of corporate governance (CG) and debt maturity (DM) on the investment inefficiency among non-financial 506 NSE-listed firms in India between 2009 and 2022. Additionally, this study also investigates the moderating effect of short-term debt (STD) maturity concerning the relationship between CG and investment inefficiency.Design/methodology/approachUtilizing the residuals extracted from the Biddle et al. (2009) investment model, three different forms of investment inefficiency (investment inefficiency, overinvestment and underinvestment) were measured. To measure the internal governance of firms, a new corporate governance index (CGI) was developed using 65 new governance stipulations, whereas STD was measured as short-term debt divided by total debt. Interaction effects between CG and DM were also estimated. Employing CGI and STD along with firm-specific control variables, many pooled regression models were estimated. Endogeneity issues were addressed through two-stage least squares. Robustness checks were also conducted using the two-step system GMM, alternative measures of dependent and independent variables.FindingsThe findings demonstrate that higher CG and shortened DM increase investment efficiency. This evidence implies that firm-level governance and short-term debt reduce information asymmetry and increase management oversight. Additionally, the evidence suggested that shortened DM and CG complement one another to increase investment efficiency, suggesting companies that utilize STD to a greater (lesser) extent demonstrate a greater (lesser) impact of CG in reducing investment inefficiency.Practical implicationsThis work first advocates the establishment and implementation of robust corporate governance mechanisms to control agency conflicts, moral hazard, adverse selection and limit opportunistic behavior of managers for improving investment efficiency. Second, since interaction effects suggest a complementarity between CG and DM, it is advocated that STDs can be used to achieve optimal investment choices to control moral hazards and adverse selection and discourage suboptimal investment levels.Originality/valueThis work provides new evidence concerning the effects of CG and DM on various forms of corporate investment efficiency (investment inefficiency, overinvestment and underinvestment, using alternate measures) in an emerging economy like India having a unique institutional framework and macroeconomic environment using a newly developed firm-specific CG index for a large sample of companies using recent data.

Environmental, social and governance (ESG) performance as a moderator in assessing the impact of government subsidies on underinvestment in China

In recent years, underinvestment has become common among subsidised enterprises in China. Stakeholder theory asserts that environmental, social and governance (ESG) performance forces enterprises to prioritise stakeholder needs by incorporating ESG principles into business operations, which in turn influences business investment decision-making. This study examines the impact of government subsidies on firm underinvestment and whether ESG performance plays a moderating role in this direct relationship. A dataset of 17,780 firm-year observations of A-share public firms in China for the period 2011–2021 was employed, and the data were analysed using the ordinary least squares regression model, fixed-effects regression model, propensity score matching difference-in-difference model, and instrumental variable approach. These results indicate that government subsidies mitigate firm underinvestment and tend to reduce underinvestment in firms with higher ESG performance. Moreover, the findings indicate that the performance in ESG factors influences the effect of government subsidies on the lack of investment in state-owned enterprises (SOEs), as opposed to non-SOEs. This effect is more noticeable in heavily polluting industries compared to non-heavily polluting industries. These findings imply that the government should promote the ESG performance of subsidised firms to enhance their overall corporate investment efficiency.

Corporate credit mismatch, financial leverage and corporate investment efficiency

We empirically test the relationship between credit mismatch and corporate investment efficiency. The study analyzes the heterogeneity of mismatch direction, corporate nature, and corporate life cycle. Results reveal that corporate credit mismatch has a significant negative impact on corporate investment efficiency; corporate financial leverage fully mediates this impact, indicating that corporations may increase their financial leverage to bridge financing gaps in cases of credit mismatch. This practice, however, may bring about greater financial risk and affect corporate investment efficiency. This study provides an important reference for enterprises and financial institutions for optimizing the financing environment, ensuring the effective allocation of financing resources, promoting the sustainable development of enterprises, thereby enhancing overall economic efficiency. This study also provides new ideas and future directions for studying corporate financing and investment behavior.

Can the construction of the social credit system improve the efficiency of corporate investment?

Based on the quasi-natural experiment of China's pilot reform of social credit system, this paper examines the effect and mechanisms of the construction of social credit system on corporate investment efficiency using the data of A-share listed companies in Shanghai and Shenzhen from 2005 to 2022. The study presents the following findings. First, the construction of social credit system significantly improves corporate investment efficiency, through three main paths: alleviating information asymmetry, improving internal corporate governance, and strengthening market competition pressure. Second, there is significant heterogeneity in the promotion effect of the construction of social credit system on corporate investment efficiency, which is more pronounced for non-state-owned enterprises and enterprises in monopolistic industries. Based on the above research conclusions, this paper puts forward policy suggestions such as establishing a comprehensive credit information sharing platform, promoting the credit rating system, strengthening credit supervision and risk early warning to improve the social credit system.

Can financial technology enhance corporate investment efficiency? Evidence from the COVID-19 pandemic

We quantify the FinTech development level by textual analysis. The results show that the intensification of the COVID epidemic adversely affects corporate investment efficiency, but the development of FinTech mitigates such a negative effect by alleviating financing constraints.

Government procurement and corporate investment efficiency: Evidence from China

This study investigates the impact of government procurement on the microeconomic landscape, particularly focusing on investment decisions and efficiency within corporations. Utilizing a dataset spanning 2015 to 2021 from A-share listed companies in China, the study examines how government contracts, as reported by the China Government Procurement website, influence corporate investment strategies. The analysis reveals that government procurement significantly enhances investment efficiency and mitigates common corporate investment deficiencies. These findings are robust, confirmed through instrumental variable techniques and validation procedures. Furthermore, the study explores the underlying mechanisms, suggesting that government procurement facilitates corporate financial fluidity and reduces environmental unpredictability. The impact is notably more pronounced in private sector entities, high-tech industries, and economically advanced regions in eastern China. This research provides empirical evidence of government procurement's efficacy as an economic instrument, highlighting its role in promoting corporate fiscal prudence. However, the study acknowledges limitations, such as potential variability in procurement practices across different regions and industries, which may affect the generalizability of the findings. Future research could explore the long-term effects of government procurement on corporate innovation and broader economic outcomes.

Remote hand: Cross-regional SASAC holdings and corporate investment efficiency: Evidence from China

The simultaneous existence of government intervention and support for state-owned enterprises makes it difficult to study the relationship between government involvement and business efficiency. Drawing on China's emerging and widely developed cross-regional state-owned holding patterns, this study examines the impact of reduced political intervention on the investment efficiency of local state-owned enterprises (SOEs) when resource support is constant. We demonstrate that the geographic separation of SASAC and SOEs contributes to corporate investment efficiency and that this effect works mainly through the reduction of political pressure and the optimisation of corporate governance. This confirms the existence of the government's grabbing effect on businesses from an opposite perspective.

Does Failure Tolerance of the Board of Directors Affect Investment Efficiency?

Based on the perspective of failure tolerance, this paper measures the boards failure tolerance by whether the companys performance failing to meet the boards expectations leads to the mandatory replacement of managers. On this basis, the paper selects data from A-share listed companies in China from 2010 to 2022 to study the impact of board failure tolerance on corporate investment efficiency. The research finds that board failure tolerance can significantly improve corporate investment efficiency, both inhibiting over-investment and alleviating under-investment.

Employee ownership and corporate investment efficiency in Europe

Employee ownership and corporate investment efficiency in Europe

Science and Technology Finance Policy and Corporate Investment Efficiency -- A Quasi-Natural Experiment Based on Pilot Policies for Integrating Technology with Financer

Science and Technology Finance Policy and Corporate Investment Efficiency -- A Quasi-Natural Experiment Based on Pilot Policies for Integrating Technology with Financer

Heterogeneous political connections and corporate overinvestment: evidence from Malaysian firms

PurposeThis paper examines the relationship between heterogeneous political connections and corporate overinvestment.Design/methodology/approachBased on a comprehensive Malaysian dataset of 834 publicly listed companies from 2000 to 2022, the authors employed multivariate ordinary least squares regression to test the relationship.FindingsDespite different types of political connections, the findings demonstrate a positive relationship between political connections and corporate overinvestment. In particular, the association is more profound in government-linked companies (GLCs) but weaker in firms that developed political ties through family members of ruling elites. Further analysis reveals that the “helping hand” effect is only observed in GLCs and firms with politically connected directors and businessmen, whereas the “grabbing hand” effect is observed among firms connected through board, businessmen, and family ties. Moreover, the relationship is more persistent among firms with politically connected directors and businessmen around the regime change.Research limitations/implicationsRegardless of the types of political connections, the findings show that politically connected firms tend to engage in rent-seeking through political patronage networks and high levels of government interference in resource allocation. Therefore, a more sophisticated monitoring system should be developed within the political patronage networks to reduce the likelihood of different types of political-business collusion. In terms of research limitations, the research design does not consider the influence of financial constraints and management efficiency. Future research could explore these facets to comprehensively understand the dynamics between political connections and corporate investment decisions.Practical implicationsThe evidence informs market participants about the relationship between heterogeneous political connections and corporate overinvestment, reinforcing previous findings that crony capitalism, political patronage, agency problems, and weak governance are well-entrenched in Malaysia’s emerging economy. The government should acknowledge these concerns by enacting anti-corruption campaigns and promoting a fair business environment. In the meantime, policymakers might redesign regulations and revise corporate governance frameworks to substantially reduce the value of political connections, thereby diminishing the bargaining power of politicians.Social implicationsAs corporate investment efficiency has a considerable impact on firm value, investment decisions that enhance firm value will increase share price and maximise shareholder value. Conversely, firms may damage shareholder value if they overinvest or undertake projects that do not yield sufficient. Hence, the findings of this study may assist investors in making more informed judgements, particularly by understanding different types of business-government relations, as political connections are one of the determinants of corporate overinvestment.Originality/valueThis study reveals that the degree to which overinvestment issues manifest within firms is influenced by the nature of the political connections those firms possess. This indicates that politically connected firms should not be regarded as a homogenous group of firms.

Banking market structure and corporate investment efficiency

The study examines the link between bank competition and firms’ capital investment efficiency. Utilizing a unique dataset comprising Vietnamese listed firms from 2007 to 2022, we suggest that heightened bank competition, as reflected by lower values of concentration ratios, the Lerner index, and the Boone indicator, raises firms’ investment efficiency. Further analysis reveals that bank competition increases investment efficiency specifically in the form of mitigating the underinvestment issue. The validity of the result holds through numerous robustness tests, especially with careful consideration of endogeneity concerns. Through mechanism tests, our study reveals that increased bank competition elevates corporate investment efficiency by mitigating firms’ financing constraints, offering more bank credit, and reducing financing costs. In cross-sectional analysis, we document that the relationship between bank competition and capital investment efficiency is stronger for firms with closer bank-firm ties, greater investment opportunities, and weaker financial positions (captured by firm size, state ownership, and listing location). Further, we observe that the influence of bank competition is attenuated during macroeconomic shocks, as exemplified by the financial crisis and the coronavirus pandemic.

The relationship between financial constraints and investment efficiency

AbstractThis study examines how financial constraints relate to firm‐level investment efficiency. Prior research theorizes that corporate borrowing by issue of risky debt induces suboptimal capital investment spending. We extend this research to examine whether firm‐level financial constraints and internal investment efficiency are significantly related. We measure firms’ degree of overall financial constraint following the procedure developed by Whited and Wu. Our results indicate that among highly financially constrained firms, overall financial constraints are positively associated with investment, and higher financial constraints are more likely to result in greater investment inefficiency. Furthermore, we find that this relationship is more prominent for companies with high free cash flow, high bankruptcy likelihood, and high growth potential. Our findings that financial constraints have significant influence on corporate investment efficiency should be of interest to company managers, investors, and regulators alike.

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.