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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| Format: | Journal Article |
| Language: | English |
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2019
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| Online Access: | https://hdl.handle.net/10356/106511 http://hdl.handle.net/10220/47942 |
| _version_ | 1811676709084200960 |
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| author | Ek, Chanbora Wu, Guiying Laura |
| author2 | School of Social Sciences |
| author_facet | School of Social Sciences Ek, Chanbora Wu, Guiying Laura |
| author_sort | Ek, Chanbora |
| collection | NTU |
| description | 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. |
| first_indexed | 2024-10-01T02:25:47Z |
| format | Journal Article |
| id | ntu-10356/106511 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T02:25:47Z |
| publishDate | 2019 |
| record_format | dspace |
| spelling | ntu-10356/1065112021-02-09T08:11:17Z Investment-cash flow sensitivities and capital misallocation Ek, Chanbora Wu, Guiying Laura School of Social Sciences Investment-cash Flow Sensitivity DRNTU::Social sciences::Economic development Financial Frictions 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. Accepted version 2019-04-01T01:59:45Z 2019-12-06T22:13:18Z 2019-04-01T01:59:45Z 2019-12-06T22:13:18Z 2018 Journal Article Ek, C., & Wu, G. L. (2018). Investment-cash flow sensitivities and capital misallocation. Journal of Development Economics, 133, 220-230. doi:10.1016/j.jdeveco.2018.02.003 0304-3878 https://hdl.handle.net/10356/106511 http://hdl.handle.net/10220/47942 10.1016/j.jdeveco.2018.02.003 en Journal of Development Economics Journal of Development Economics © 2018 Elsevier B.V. All rights reserved. This paper was published in Journal of Development Economics and is made available with permission of Elsevier B.V. 34 p. application/pdf |
| spellingShingle | Investment-cash Flow Sensitivity DRNTU::Social sciences::Economic development Financial Frictions Ek, Chanbora Wu, Guiying Laura Investment-cash flow sensitivities and capital misallocation |
| title | Investment-cash flow sensitivities and capital misallocation |
| title_full | Investment-cash flow sensitivities and capital misallocation |
| title_fullStr | Investment-cash flow sensitivities and capital misallocation |
| title_full_unstemmed | Investment-cash flow sensitivities and capital misallocation |
| title_short | Investment-cash flow sensitivities and capital misallocation |
| title_sort | investment cash flow sensitivities and capital misallocation |
| topic | Investment-cash Flow Sensitivity DRNTU::Social sciences::Economic development Financial Frictions |
| url | https://hdl.handle.net/10356/106511 http://hdl.handle.net/10220/47942 |
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