The ownership effect on corporate investment distortion in the transitional economies: Mitigating or exacerbating?

This article analyzes how asymmetric information in corporate management and equity financing distorts corporate investment and how different corporate ownership (government, managerial, and foreign) affects investment distortion in a transitional economy. When managerial entrenchment is sufficientl...

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Bibliographic Details
Published in:Review of quantitative finance and accounting 2021-08, Vol.57 (2), p.523-555
Main Authors: Wu, Ying, Duong, Hong Kim, Libin, E., Yao, Hong
Format: Article
Language:English
Subjects:
Accounting/Auditing
Asymmetric information
Bias
Corporate Finance
Corporate management
Distortion
Econometrics
Economics and Finance
Equity financing
Finance
Investments
Operations Research/Decision Theory
Original Research
Ownership
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Summary:This article analyzes how asymmetric information in corporate management and equity financing distorts corporate investment and how different corporate ownership (government, managerial, and foreign) affects investment distortion in a transitional economy. When managerial entrenchment is sufficiently high, government ownership further distorts investment by biasing downward managers’ net marginal cost of investment; in contrast, managerial and foreign ownership counter the bias and thereby reduce investment distortion. Furthermore, unlike government ownership, managerial and foreign ownership mitigate rather than exacerbate the extent to which high entrenchment distorts investment. An econometric analysis of a large sample of Chinese public firms provides strong evidence in support of these theoretical predictions.
ISSN:0924-865X
1573-7179
DOI:10.1007/s11156-020-00954-1