Debt choice, growth opportunities and corporate investment: evidence from China
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Financial Innovation
RESEARCH
Open Access
Debt choice, growth opportunities and corporate investment: evidence from China Ning Ding1, Kalimullah Bhat1* * Correspondence: bhat_dufe@ outlook.com 1 School of Finance, Dongbei University of Finance and Economics, Dalian, China Full list of author information is available at the end of the article
and Khalil Jebran2
Abstract The study aims to investigate how relying on short-term debt may help Chinese listed firms to make efficient investment decisions and reduce overinvestment problem for low-growth firms. The study uses a large set of panel data of nonfinancial Chinese listed firms over the period 2007–2017 and, using the robust twostage generalized method of moments, which is robust to unobserved heterogeneity of individual firms and addresses endogeneity issues. Findings show a positive relationship between growth and investment; this association is enhanced by leverage, especially for high-growth firms. This supports the view that short-term debt helps Chinese firms to make optimal use of leverage and therefore make better investment decisions. Furthermore, the results reveal that leverage plays a disciplining and monitoring role to reduce overinvestment incentive for low-growth firms. Overall, the study suggests that shareholders should consider short-term debt to mitigate the debt overhang problem and restrict the opportunistic behavior of managers, which can lead to efficient investment decisions. It also provides foreign investors insights about capital structure in China, and how it can help them make better investment decisions. Keywords: Chinese firms, Leverage, Growth, Investment
Introduction The interaction of financing and investment decisions is a subject of considerable discussion in economic literature. Modigliani and Miller (1958) argue that, in a perfect capital market, both financing and investment decisions are not interdependent. However, theoretical and empirical literature relaxed perfect market assumptions, subsequent studies revealed how market frictions and imperfections cause interactions between financing and investment strategies. Myers (1977) argues that managers may give up some projects with positive net present values (NPVs) due to underinvestment problems. Dang (2011) suggests that short-term debt that expires before a new investment project, in anticipation of valuable growth opportunities, mitigates the debt overhang. Adjusting future capital structure over time and under a static debt policy is very costly for firms. The costs that arise from investment deviations can lead firms to reduce their leverage and also may have no impact on debt maturity. However, adopting © The Author(s). 2020 Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if chan
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