The Association Between the Ownership Structure and the Financial Constraints: An Analysis Using Chinese Firm Data

This study examines Chinese firms’ investment sensitivity to the internal cash flows and the ownership structure. We adopt the financial data of 3,003 Chinese listed firms on the Shanghai Stock Exchange and the Shenzhen Stock Exchange from 2005 to 2016. Using the Euler equation model through a generalized method of moments estimation method, we find that China's corporate investment faces severe financial constraints, indicating that the Chinese capital market is not yet fully developed. Although both state-owned enterprises (SOEs) and private firms experience financial constraints for their investments, SOEs face more serious financial constraints compared with private firms. This result is reinforced if we consider the interaction term of cash flow and a state share dummy variable in the regression. That is, a higher share of state ownership increases the degree of financial constraints. Our findings support the argument that private Chinese firms are able to mobilize external funds at a lesser cost, and Chinese financial markets are, to some extent, beginning to function properly as a financial source for private firms.