Investment-cash flow sensitivities and capital misallocation
This paper directly estimates the effect of financing constraint on capital misallocation. We provide a simple theoretical framework that links the heterogeneity in investment-cash flow sensitivity, a common indicator of financing constraint, to the dispersion of marginal revenue product of capital,...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2019
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| Subjects: | |
| Online Access: | https://hdl.handle.net/10356/106511 http://hdl.handle.net/10220/47942 |
| Summary: | This paper directly estimates the effect of financing constraint on capital misallocation. We provide a simple theoretical framework that links the heterogeneity in investment-cash flow sensitivity, a common indicator of financing constraint, to the dispersion of marginal revenue product of capital, a direct measure of allocative inefficiency. Our model shows that the existence of both constrained and unconstrained firms is a sufficient though not necessary condition for capital misallocation. Empirically, we run an error-correction investment model for U.S. Compustat and Chinese manufacturing firms, and for various sub-samples of the Chinese firms. Our estimates on investment-cash flow sensitivities imply a 5% and 15% total factor productivity loss respectively for the balanced and unbalanced panels of Chinese firms. Our identification strategy does not require any monotonic relationship between investment-cash flow sensitivities and severity of financial frictions, thus is not subject to the Kaplan and Zingales critique. |
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