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,...
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sg-ntu-dr.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 |
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Investment-cash Flow Sensitivity DRNTU::Social sciences::Economic development Financial Frictions Ek, Chanbora Wu, Guiying Laura Investment-cash flow sensitivities and capital misallocation |
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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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School of Social Sciences |
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School of Social Sciences Ek, Chanbora Wu, Guiying Laura |
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Article |
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Ek, Chanbora Wu, Guiying Laura |
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Ek, Chanbora |
title |
Investment-cash flow sensitivities and capital misallocation |
title_short |
Investment-cash flow sensitivities and capital misallocation |
title_full |
Investment-cash flow sensitivities and capital misallocation |
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Investment-cash flow sensitivities and capital misallocation |
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Investment-cash flow sensitivities and capital misallocation |
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investment-cash flow sensitivities and capital misallocation |
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2019 |
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https://hdl.handle.net/10356/106511 http://hdl.handle.net/10220/47942 |
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1692012902730432512 |