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Remedial role of financial development in corporate investment amid financing constraints and agency costs

journal contribution
posted on 02.05.2019, 00:00 by MK Khan, Y He, Ahmad KaleemAhmad Kaleem, U Akram, Z Hussain
The study investigates the role of financial development in boosting the investment efficiency of firms’ investments in China. Using a large sample of firm-level financial data and country level economic data over the period 2004-2015, present study creates a link between financial and real economy. Firms are priori classified into under- or over-invested and effect of financial development is analyzed individually on each classification by using panel data estimations. The research concludes that firms suffering from under- (over-) investment problem due to financing constraints (agency problem), are more likely to increase (decrease) their investment` in the response of underlying financial development in the economy. This study has demonstrated a novel approach by concurrently incorporating the monitoring and financing issues that disturb the optimal level of investments. Moreover, the findings give strong implications by suggesting and empirically proving the remedy that has the potential to balance the investment distortions by rectifying monitoring and financing deficiencies. © 2018 The Author(s).

History

Volume

19

Issue

1

Start Page

176

End Page

191

Number of Pages

16

eISSN

2029-4433

ISSN

1611-1699

Publisher

Taylor & Francis, UK

Additional Rights

CC BY 4.0

Peer Reviewed

Yes

Open Access

Yes

Acceptance Date

26/04/2017

External Author Affiliations

Beijing University of Posts and Telecommunications; University of International Business and Economics, China

Era Eligible

Yes

Journal

Journal of Business Economics and Management