Financial constraints, investment efficiency and corporate governance: Empirical evidence from China

This paper focuses on the relationship between financial constraints, corporate governance and investment efficiency in China over the 2007-2011 period. In order to identify the existence of financial constraints, we grouped these companies according to their size, dividend payout and the KZ index. A model was estimated: financial constraints index model to examine the effect of investment efficiency on firms´ financial constraints and to estimate the sensitivity of investments to cash flow. The study confirms that the financial constraints are positively and significantly associated with the sensitivity of investment to cash flow. We found that corporate governance and ownership have significant effects on firms´ investment decisions. The results suggest that information asymmetry theory cannot fully explain the financial constraints and investment cash flow sensitivity in our country, so the corporate governance is an important determinant in explaining them.