Improve Investment Efficiency Research Articles

Research on the Influencing Factors of Power Demand in China

Based on the data from 2003 to 2017 of China, this paper analyzes the influencing factors of power demand in China. The results show that the improvement of economic development and the growth of the economic contribution rate of the secondary industry both lead to the increase of electricity demand. The improvement of urbanization level and the reduction of unemployment rate are also important factors driving the electricity demand. While the price of electricity has little impact on the demand, which can be accredited to the electricity price policy of China. Electricity price is mainly regulated rather than fluctuating with the supply and demand of the market, thus it is relatively stable. The conclusions of this research can be used to guide the planning and management of power companies, which is of great significance for them to accurately predict electricity consumption, scientifically plan power grid projects, and further improve investment efficiency.

An Empirical Research on the Relationship between Product Market Competition and Investment Efficiency

As an important external governance mechanism, the impact of product market competition on corporate governance and investment and financing has long attracted the interest of economists and financial scholars. Although a large number of studies have focused on the economic consequences of product market competition in terms of investment, most of the research methods are based on cross-sectional analysis, such as the investment-investment opportunity sensitive model of Fazzari, et al.（1988）, Richardson’s over-investment model（2006）, the degree of market competition represented by the HHI, Tobin Q model, Sales Acceleration Model, and so on. These studies tend to support that product market competition can improve investment efficiency, but the conclusions lack robustness, and some even have fallacies. Therefore, it is necessary to explore new methods to promote the expansion of research on the economic consequences of product market competition and the influencing factors of enterprises’ over-investment.In order to further improve the level of opening up to the outside world, China has made a substantial adjustment to the Catalogue of Industries for Guiding Foreign Investment in 2011. Restrictive foreign investment projects have been greatly reduced, and the market access for primary, secondary and tertiary industries has been fully relaxed. This policy provides an ideal quasi-natural experimental platform for us to overcome endogenous problems by using double difference method: （1）With the improvement of opening-up level, the competition level of the domestic market will increase correspondingly（Jiang and Lu, 2018）.（2）The purpose of adjusting the Catalogue is to improve the level of market opening to the outside world, not to affect the efficiency of enterprises’ investment.（3）Enterprises cannot accurately predict the specific time and scope of the adjustment of the Catalogue, which is exogenous.（4）The adjustment scope of the Catalogue in 2011 is relatively large, and the seven industries classified by the CSRC in 2012 are designed as influential models. The impact effect is obvious.（5）The sample period selected in this paper is more balanced than before and after 2011, which is convenient to observe the difference of investment efficiency before and after policy changes. At the same time, in order to overcome the limitations of investment efficiency measurement in previous studies, this paper uses the DEA method to measure the investment efficiency of enterprises.This paper finds that the improvement of product market competition is helpful to improve the efficiency of enterprise investment. Further mechanism tests show that external market competition can improve investment efficiency by restraining agency conflicts and improving incentive effectiveness. At the same time, for state-owned enterprises and functional enterprises, the improvement of product market competition plays a greater role in improving investment efficiency. The conclusions of this paper have important policy implications: Firstly, the conclusions support the general policy tendency of further expanding China’s opening to the outside world, and the market competition brought about by expanding the opening will play a positive decision-making effect at the micro level. Secondly, they support senior managers’ shareholding policy in the process of mixing reform in China. We should design not only agency cost reduction mechanisms（such as the restraint and check-and-balance mechanism）, but also reasonable incentive mechanisms（such as executive shareholding）, which has positive economic consequences. Thirdly, for state-owned enterprises and functional enterprises, we should introduce or increase industrial openness, increase market competition, eliminate factors affecting market competition, strengthen the role of the market mechanism, and let the market mechanism play an investment regulating role through the product market, capital market and manager market, which will be conducive to the improvement of enterprise efficiency.

Accounting for fixed assets and investment efficiency: a real options framework

In a perfect world, a manager's investment in fixed assets would increase with the assets’ profitability. However, when managers privately know their project profitability and care about their company's short-term share price, managers of less profitable firms face the temptation to overinvest in order to pool with strong firms. This creates pressure on strong firms to overinvest to the point where weak firms cease to find it worthwhile to mimic strong firms. I show that, when firms have abandonment options, the willingness of a weak firm's manager to mimic depends on the expected future resale value of the fixed assets. An impairment policy (prohibiting write-ups) reduces the value of abandonment options, which are particularly important for weak firms. The reduced value of the abandonment options decreases the amount of overinvestment required by strong firms to separate themselves from weak firms. I also show that allowing firms to choose depreciation schedules improves investment efficiency: in equilibrium, strong firms choose faster depreciation. Last, in the staged-investments setting, I show that an impairment policy also mitigates underinvestment at an initial stage. These findings rationalise the current accounting standards for fixed assets and contribute to related policy debates on accounting measurement.

Evaluating the Investment Efficiency of China’s Provincial Power Grid Enterprises under New Electricity Market Reform: Empirical Evidence Based on Three-Stage DEA Model

The new round of electricity market reform in 2015 completely changed the profit pattern of power grid enterprises (PGEs) in China, and directly affected their investment plans. Under the new electricity market reform (NEMR), the government regulatory authority made higher requirements for the investment efficiency of PGEs, and the investment effectiveness hence became the core criterion for investment plans. Therefore, the PGEs are now attaching great importance to the investment efficiency. According to their geographical differences, this paper divides the Chinese provincial PGEs into three groups, namely eastern, central and western region enterprises. Based on the NEMR, we developed an evaluation system of investment efficiency for the above-mentioned enterprises. Moreover, this paper selects GDP per capita, electricity consumption in industry, and electrification rate as external environment variables, and conducts an empirical research on the investment efficiency of 31 provincial PGEs in China in 2017. The analysis reveals that three external environment variables have considerable impacts on the investment efficiency. Though the increase of GDP per capita and electricity consumption in industry are not conducive to improving investment efficiency, the advancement of electrification plays a positive role in its improvement. And from the real efficiency results, Tianjin, Liaoning, Jiangsu, and Fujian have relatively higher investment efficiency, while Henan, Shandong, and Shanghai exhibit lower investment efficiency. By comparing the investment efficiency of PGEs in the first and third stage, conclusions can be drawn that in the first stage the investment efficiency of PGEs was overestimated, and the inefficient investments prevailed some provincial PGEs, which caused by low scale efficiency.

Impact of Corporate Environmental Responsibility on Investment Efficiency: The Moderating Roles of the Institutional Environment and Consumer Environmental Awareness

The increasingly serious destruction of the natural environment represents a great threat to the sustainable development of human beings and the earth. Under pressure from the government and public opinion, companies must assume environmental responsibility; however, there is no conclusion on whether corporate environmental responsibility is beneficial to companies. From the perspective of investment efficiency, this paper collects panel data from Chinese listed companies from 2011 to 2016 to discuss the impact of corporate environmental responsibility on investment efficiency and the moderating role of the institutional environment and consumer environmental awareness. The results show that corporate environmental responsibility can significantly positively affect investment efficiency, but this effect is not a short-term effect; it needs time to play a role. Second, in regions with a good institutional environment, corporate environmental responsibility has a more significant impact on improving investment efficiency. Finally, with the improvement of consumer environmental awareness, companies that assume environmental responsibility can address underinvestment. The research in this paper supports stakeholder theory, indicating that corporate environmental responsibility is not “selfless dedication”. In addition, the research results of this paper are robust and not subject to endogenous influences.

Independent directors and corporate investment: evidence from an emerging market

Purpose The purpose of this paper is to examine whether independent directors reduce corporate overinvestment and improve investment efficiency in an emerging market. Design/methodology/approach First, the author developed a research model in which corporate investment is a function of Tobin’s Q, the proportion of independent directors in the board and an interaction between them. Second, the author divided the full sample into groups of firms with a low- and high-financial constraint to compare the effects of independent directors between financially unconstrained and constrained firms. Findings With a full sample of 1,281 observations collected from 193 firms listed in Ho Chi Minh Stock Exchange during the period from 2009 to 2017, the author find that the proportion of independent directors is negatively related to firm investment but its interactive term with Tobin’s Q is positively related to corporate investment. These findings imply that independent directors can help firms reduce overinvestment and improve investment efficiency. Moreover, the research findings indicate that these effects of independent directors are stronger for financially constrained firms. Originality/value The extant literature shows that independent directors are an effective mechanism to reduce agency problems in firm decisions and operating performance. However, there has been no research on the role of independent directors in corporate investment policy.

The Effects of Earnings Persistence on Corporate Investment Efficiency

본 연구에서는 이익지속성이 기업의 투자효율성에 미치는 영향에 대해 연구한다. 또한 기업의 투자성향에 따라 과잉투자 및 과소투자 그룹으로 구분하여 이익지속성이 과잉투자 및 과소투자 문제를 완화하는지에 대해 검증한다. 선행연구에서는 이익지속성이 높을수록 당기의 이익으로 미래성과 및 미래현금흐름을 유용하게 예측할 수 있으며, 이는 이익의 질이 높다는 것을 의미한다(Dichev et al. 2013). 이러한 미래성과를 반영하는 신뢰성 있는 회계정보를 통해 경영자는 보다 나은 프로젝트를 선별하고 투자결정에 유용하게 사용할 수 있으므로 투자효율성이 개선 될 것이라고 예상한다. 이에 따라 이익지속성은 기업의 투자효율성과 양(+)의 관계가 있을 것이라는 가설을 검증한다. 이익지속성은 Sloan(1996)의 모형으로 측정하고, 투자효율성은 Biddle et al. (2009)의 모형으로 측정한다. 2011년부터 2016년까지 유가증권 및 코스닥 시장에 상장된 7,332개 기업을 대상으로 연구한 결과, 이익지속성이 높을수록 기업의 투자효율성이 향상되는 것으로 나타났다. 과잉투자 기업과 과소투자 기업을 구분하여 분석한 결과, 이익지속성이 과소투자 기업의 투자를 촉진하여 과소투자 문제를 완화하지만, 과잉투자 기업에는 큰 영향을 미치지 않는 것으로 나타났다. 분석의 강건성을 확인하기 위해 투자효율성 측정치를 달리한 분석에서도 일관된 결과를 도출하였다. 본 연구는 선행연구가 재무보고 품질을 측정하는데 주로 발생액의 질로 측정한 것과는 달리 이익지속성을 이익의 질의 대용치로 사용하여 투자효율성과의 관련성을 검증하였다는 점에서 의의가 있다.This study analyzes the effects of earnings persistence on corporate investment efficiency. According to prior research, the higher earnings persistence is, the more profitable future earnings and future cash flows can be predicted, which means that earnings quality is higher(Dichev et al. 2013). Such reliable accounting information can be used by managers to select better projects and improve investment decision making. Therefore, this study examines the hypothesis that earnings persistence will be positively related to investment efficiency. Earnings persistence is measured by Sloan(1996) and investment efficiency by Biddle et al.(2009). The sample consists of firms listed on the Korea Stock Exchange over the period of 2011 to 2016. The main results of this study are as follow. The results show that earnings persistence is positively related with investment efficiency, implying that firms with higher earnings persistence show higher investment efficiency. According to Biddle et al.(2009), the research sample is divided into over-investment group and under-investment group. As a result, earnings persistence promotes investment of under-investment group to mitigate under-investment problems, but it does not have a significant effect on over-investment group. In conclusion, earnings persistence increases the investment efficiency. It also increases the investment efficiency of under-investment firms more than over-investment firms. These results are consistent with the analysis of using other investment efficiency measures to confirm the robustness of the analysis. This study contributes to a growing body of literature by providing empirical evidence of earnings persistence role in improving investment efficiency.

Organizational Structure, Voluntary Disclosure, and Investment Efficiency

An important role of corporate disclosure is to improve the efficiency of capital allocation, and a key part of this process is firms’ internal allocation of capital across their multiple projects. This paper examines the effect of internal capital allocation on firms’ disclosure incentives and how these incentives affect internal capital allocation and investment efficiency. I identify conditions under which the multi-project firm that can perform internal capital allocation withholds more information than a group of stand-alone firms. Under these conditions, I show that the investment efficiency of the multi-project firm is higher than that of a group of stand-alone firms. The results suggest that corporate disclosure and internal capital allocation are substitutes in improving investment efficiency. This provides one explanation for why a multi-divisional structure may be preferred, although the structure appears inefficient.

Housing Bubbles, Economic Growth, and Institutions

Rising housing prices are accompanied by higher household consumption and firm investment that boost economic growth. However, excessive house price appreciations may distort capital allocation efficiency, for example by crowding out investments in productive sectors, which reduce long-term economic growth. Moreover, house price bubbles are typically unsustainable. Once a housing bubble bursts, credit conditions will tighten due to falling collateral value, leading to a fall in household consumption and employment that cause an economic downturn. Meanwhile, the correction of housing prices may improve investment efficiency and trigger structural reform that subsequently enhances economic growth. We look into the trade-off between the aforementioned effects at different stages of housing cycles and economic growth. Using a quarterly dataset that covers cross-country house prices over four decades, we find that house price appreciations are positively associated with economic growth, while the relationship between house price depreciations and economic growth is highly non-linear, depending on country-specific characteristics. In the absence of confounding crisis in the financial sector, short-lived large house price depreciations, rather than prolonged and modest ones, are positively associated with economic growth. The association between house price depreciations and economic growth is subject to legal systems, mortgage insurance, and personal bankruptcy law.

Auditor Alignment and the Internal Information Environment

We investigate if and how aligned auditors (where parent and subsidiary are audited by auditors from the same audit firm network) serve as information intermediaries within business groups and thereby improve decision-making. Using a sample of European groups, we find that auditor alignment improves decision-making as it facilitates group investment efficiency and tax planning and, at the subsidiary level, it decreases the loss-making likelihood as well as improves investment efficiency. We show that the reason for these decision-making improvements is that aligned auditors act as information intermediaries within the business groups: they increase the speed at which information is compiled, they enhance the comparability of information, and they improve information generation. We triangulate these empirical results with a series of semi-structured interviews and provide specific examples of how aligned auditors can improve information flows in groups. Lastly, we use the staggered introduction of the revised ISA 600, which was incorporated in the applicable audit standards in most countries of our international sample, as exogenous variation in the subsidiary’s auditor alignment likelihood to alleviate endogeneity concerns. Our contribution is of interest to audit committees who appoint auditors, regulators who consider group audits to be a priority topic, and to practitioners and academics alike by demonstrating the benefits of an important audit characteristic, auditor alignment, for the internal information environment of business groups.

Subordinates’ Horizon, Internal Governance and Corporate Investment Efficiency

In this paper, we investigate whether internal governance mitigates any investment inefficiencies. Internal governance is defined as the process through which younger subordinate executives provide monitoring role over the CEO and affect corporate decisions. Subordinate executives have longer decision horizon compared to the CEO and have the incentives to refrain from taking value-destroying actions for the benefit of short-term performance. Key subordinate executives also possess a great influence on a firm’s decision making process. Using the key subordinate executives’ horizon relative to CEO horizon as a measure of internal governance, we analyze whether internal governance mitigates any under- or over-investment problem. We use U.S. data and find that firms with better internal governance suffer from less under-investment problem. Specifically, we find that internal governance is positively associated with the level of investment for firms that are likely to under-invest. However, we do not find evidence that internal governance mitigates the over-investment problem. Overall, the results of our study provide supporting evidence that, for firms suffering an under-investment problem, bottom-up internal governance is effective in improving investment efficiency. Our results remain consistent regardless of the types of investment or the method of measuring investment efficiency.

Female directors on the board and investment efficiency: evidence from Korea

We investigate whether female board representation affects investment efficiency at Korean publicly traded companies from 2006 to 2014. We find a positive association between female directorship and investment efficiency. For a subsample of firms that are classified into over- and under-investment groups, we find that the subsample of firms with female directors is less likely to over-invest compared to the group without female directors. This implies that female directors’ risk-aversion, conservatism, and prudence affect investment efficiency by reducing over-investment rather than reducing under-investment. Other robustness tests corroborate our conclusion that female directors help to improve investment efficiency.

Financial Reporting and Credit Ratings: On the Effects of Competition in the Rating Industry and Rating Agencies' Gatekeeper Role

AbstractThis paper studies firms' financial reporting incentives in the presence of strategic credit rating agencies and how these incentives are affected by the level of competition in the rating industry and by rating agencies' role as gatekeepers to debt markets. We develop a model featuring an entrepreneur who seeks project financing from a perfectly competitive debt market. After publicly disclosing a financial report, the entrepreneur can purchase credit ratings from rating agencies that strategically choose their rating fees and rating inflation. We derive the following core results: (1) More rating industry competition leads to stronger corporate misreporting incentives if ratings are sufficiently precise or if rating agencies assume a gatekeeper role. Under imperfect rating industry competition, (2) agencies' gatekeeper role primarily weakens firms' misreporting incentives, which then influences rating agencies' strategies, and (3) firms' misreporting and rating agencies' rating inflation can be strategic complements when agencies assume a gatekeeper role. (4) Regulatory initiatives aimed at increasing rating industry competition or at weakening rating agencies' gatekeeper role improve investment efficiency as long as corporate misreporting incentives are not significantly strengthened.

Off-Balance Sheet Funding, Voluntary Support and Investment Efficiency

Financing an investment off-balance sheet gives a bank the option, but not the obligation, to voluntarily support debt repayments using its on-balance sheet funds when the investment fails. Such flexibility, which is absent with on-balance sheet funding, allows the bank to signal information about the quality of its future projects, improving investment efficiency. Yet, off-balance sheet funding reduces the bank's skin-in-the-game and effort incentives. Off-balance sheet funding with voluntary support is optimal for activities that are rapidly growing or negatively correlated with existing assets. The model yields testable predictions on the relationship between off-balance sheet debt spreads and sponsors' characteristics.

Accounting for Intangibles: Can Capitalization of R&D Improve Investment Efficiency?

This paper investigates the potential for accounting rules to mitigate under‐investment induced by myopic managerial incentives. It exploits the difference within US GAAP requiring the capitalization of some research and development (R&D) costs in software development but proscribing the capitalization of R&D in other industries. We first investigate whether other hi‐technology firms with no capitalization of R&D costs suffer higher levels of under‐investment in myopic settings relative to software development firms. Second, we investigate whether the capitalization rule assists in mitigating under‐investment within the software development industry, and whether this comes at the cost of over‐investment in the presence of financial flexibility. Our findings are consistent with the mitigation of under‐investment in the software development setting but we find no evidence of over‐investment in the presence of high financial flexibility. Other hi‐tech firms that cannot capitalize R&D costs suffer higher levels of under‐investment relative to software development firms. Finally, we find that the ability to capitalize for the sample of software firms does reduce the probability of cutting R&D investment when managers are under earnings pressure. The findings in this paper are relevant to standard setters seeking to understand the costs imposed by (understandably) conservative accounting rules, and how verification of points of feasibility alongside less conservative accounting can prevent dysfunctional investment outcomes. This is the first study to consider whether the ability to (justifiably) capitalize the costs of internally generated intangibles can improve investment efficiency (the allocation of resources).

Do National Industrial Relocation Demonstration Zones Have Higher Total Factor Productivity

In response to the changes in the economic environment at home and abroad, several National Industrial Relocation Demonstration Zones（NIRDZs）have been set up in China’s central and western areas since 2010. How does the establishment of NIRDZs affect total factor productivity（TFP）? The answer to this question is of great practical significance to further optimize the development of NIRDZs, change the pattern of economic growth, and promote regional coordinated development. The TFP of 285 cities at prefecture level is measured by using the Solow Residual method, and the average TFP of these areas shows a downward trend within the observation interval. The three demonstration areas with the highest TFP in 2015 are the Guang’an NIRDZ in Sichuan Province, the Xiangnan NIRDZ in Hunan Province and the Wanjiang NIRDZ in Anhui Province, showing that the quality of economic development in these areas is relatively higher. The three demonstration areas with the lowest TFP are the Yinchuan-Shizuishan NIRDZ in Ningxia Autonomous Region, the Yellow River golden triangle NIRDZ and the Gansu Lanbai NIRDZ, which reflects that these areas have relatively lower input-output efficiency. A difference-in-differences（DID）approach is used to analyze the policy treatment effect of NIRDZs on regional TFP. The results show that the policy treatment effect on regional TFP in the observation period is negative, indicating that the establishment of NIRDZs for undertaking industrial relocation in central and western areas does not improve regional TFP, more than that, the regional TFP of NIRDZs decreases significantly. There exist obvious regional differences in the policy treatment effect. The effect of the central region is not significant, while that of the western region is significantly negative. The empirical analysis shows that the significant increase of the fixed asset investment after the establishment of NIRDZs is the main cause for the decrease of TFP. The effect of industrial upgrading is not obvious, and the impact of undertaking polluting industry relocation on TFP has regional differences. Therefore, in order to promote high-quality development in the central and western areas, these regions need to further improve investment efficiency in the process of undertaking industrial relocation, thoroughly implement the concept of green development, and prevent the relocation of backward production capacity and polluting industries. At the same time, they should establish a coordination mechanism for inter-regional industrial relocation and a service mechanism for connecting major projects, promote cluster industrial relocation, strengthen innovation-driven development, and accelerate technological progress, so as to enhance the endogenous growth capacity of these areas.

Corporate investment efficiency: The role of financial development in firms with financing constraints and agency issues in OECD non-financial firms

Corporate investment in firms deviates from optimal level due to financing and agency issues. Managers of the affected firms trap into over- or under-investment causing investment inefficiencies. Earlier research fails to address the ramifications of financial development on over- and under-investment of firms. This study tries to fill this gap. Analyzing an annual unbalanced panel dataset of non-financial firms in 35 OECD member countries from 1990 to 2015, our empirical results show that 1) financial development has a positive impact on corporate investment; and 2) for a one standard deviation increase in financial development, it can help to increase investment efficiency by 0.423% for under investing firms (mostly due to financing constraints), and to reduce investment inefficiency in firms that are currently over investing (mostly due to agency issues) by 0.902%. When economic growth is taken into consideration, financial development is most effective on improving investment efficiency for both under- and over-investment firms in countries with high GDP growth rates. Overall, these findings suggest that monitoring and financing mechanisms of financial development have positive implications on corporate investment efficiency. Our findings are robust to alternative specifications.

Does cross-listing in the US improve investment efficiency? Evidence from UK firms

We examine whether managers of cross-listed firms improve corporate investment efficiency through learning from the stock market upon cross-listing. Using a sample of UK firms cross-listed on US regulated and unregulated stock markets, we find that cross-listed firms on unregulated markets invest more efficiently than non-cross-listed firms following cross-listing. Moreover, we find that cross-listed firms improve their investment efficiency post cross-listing. Furthermore, we find firms with low level of private information embedded in their stock prices, and firms with higher board independence improve their investment post cross-listing. Our findings suggest that managers of cross-listed firms are guided by firm-specific characteristic more than by stock market signals when they embark on new investment projects. We also find evidence that cross-listed firms on regulated exchanges perform poorly after cross-listing, whereas those cross-listed on unregulated exchange experience high performance post cross-listing.

Bulgaria: 2019 Article IV Consultation-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for Bulgaria

This Article IV Consultation highlights that economic performance remains robust but risks to the outlook are tilted to the downside amid slowing external demand. Sound macroeconomic policies notwithstanding, Bulgaria faces a sizable income gap vis-à-vis the EU average and unfavorable demographic prospects. The main policy challenge is to raise growth potential, which calls for broad-based structural reforms to improve public goods provision and institutions. The Article IV discussions focused on medium-term reforms to improve public goods provision and raise potential growth and on near-term policies to enhance financial sector stability. Fiscal policy is broadly appropriate, but the efficiency of spending and revenue administration could be further improved. Stronger public investment management would improve investment efficiency and transparency. Better performance of state-owned enterprises would help raise growth potential and mitigate fiscal risks. Bank profits have risen and non-performing loans (NPLs) have continued to decline, although they are still high among EU countries. The central bank should ensure that banks with high NPLs have adequate capital buffers.

The Spillover Effects of MD&A Disclosures for Real Investment: The Role of Industry Competition

We explore whether disclosures in the Management Discussion & Analysis (MD&A) have spillover effects for investment and investment efficiency, and whether spillover effects vary with competition. We focus on the tone of MD&A disclosures and document that the association between a ompany’s investments and the tone of its rivals’ MD&A disclosures is positive. Moreover, this association is stronger when firms operate in industries that have lower entry costs, are larger, and have less substitutable products. We obtain similar results for investment efficiency. Overall, our evidence suggests that MD&A disclosures have spillover effects for investment that can improve investment efficiency, and that spillover effects are moderated by industry competition.