Investment and the Cost of Capital: Evidence from China's Industrial Enterprises
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| Title | Investment and the Cost of Capital: Evidence from China's Industrial Enterprises
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| Author | Xu Mingdong and Chen Xuebin |
| Organization | Fudan University Academy of Finance |
| Email | xumind@fudan.edu.cn,chenxb@fudan.edu.cn |
| Key Words | Corporate Investment; Elasticity of Capital Cost; Interest Rate Channel; Credit Channel |
| Abstract | Based on the neoclassical investment model and NBS database over the period 1999-2007,this paper uses dynamic panel method proposed by Arellano&Bond (1991) to estimate the cost capital elasticity of business investment in China,and test whether market-oriented reforms significantly increased capital cost sensitivity of state-owned enterprise’s investment.The results show that: (1) The capital cost elasticity of industrial enterprises investment in China is significantly negative;But compared to the net cash flow coefficient (long-term coefficient 0.681), the coefficient of cost of capital (long-term coefficient only -0.058) is very small.(2) Ownership is an important factor in affecting the capital cost sensitivity of corporate investment, and specifically private and foreign enterprises are sensitive to the cost of capital, while the state-owned and collective enterprises are yet not.(3) Market-oriented reforms significantly weaken the financing constraints of all business types, but do not significantly improve the capital cost sensitivity of various business types, especially state-owned enterprises. Currently the crux of the interest rate transmission mechanism in China is weak link in business investment and capital cost.The two-track mode of the interest rates and underestimated regulated rate distort the role of price signals, inspire arbitraging activities, and deteriorate the dual structure of fund markets. Accelerating the pace of interest rate liberalization and deepening the reform of state-owned enterprises are necessary for improving the effectiveness of price-based monetary policy tools. |
| Serial Number | WP190 |
| Time | 2012-02-14 |
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