The Effect of Internal Cash Flow on the Investment of Chinese Listed Companies

In order to test how financing factors influence the investment of Chinese listed companies, a theoretical and empirical analysis is conducted to prove the effects of internal cash flow on the corporate investment based on Chinese system background. The research shows that underinvestment will occur when free cash flow is low; otherwise, overinvestment will occur, under both circumstances, the corporate investment is sensitive to internal cash flow. As internal cash flow in non-state-holding enterprises is higher than that in state-holding enterprises on the average, and non-state-holding enterprises face more financing constraints, therefore, the investment is more sensitive to cash flow in non-state-holding enterprises than in state-holding enterprises. That provides evidence for perfecting investment and financing system and corporate governance mechanism to improve investment efficiency in Chinese listed companies.