Utilizing the removal of the bank lending interest rate floor (IRFD) in China as an exogenous shock of banking liberalization, we find that IRFD leads to a significant rise in firms’ cost of equity capital, which is consistent with the prediction from the MM theory. The identified effects are more pronounced among firms with weaker ex-ante corporate governance and more severe ex-ante agency problems. We also find that IRFD witnesses an increase in the amount of acquired bank loans, a decrease in the average interest rate, and an increase in free cash flow. Further evidence also suggests IRFD provokes a drop in firms’ investment quality. Overall, our findings highlight an unexplored role of banking sector deregulation on firms’ cost of equity capital.

This paper investigates the free cash flow productivity of SOEs compared with non-SOEs and examines its possible determinants. We find that SOEs have slightly weak free cash flow productivity but significantly stronger than non-SOEs. Similar performance exists among commercial class I and II SOEs and public-benefit SOEs. Further analyses suggest that firm size, age, sales growth, ownership concentration, government subsidies, and industry monopoly factors cannot explain this phenomenon. The common driver for all types of SOEs to generate stronger free cash flows than nonSOEs is their stronger expense control capability.

This paper investigates the free cash flow productivity of SOEs compared with non-SOEs and examines its possible determinants. We find that SOEs have slightly weak free cash flow productivity but significantly stronger than non-SOEs. Similar performance exists among commercial class I and II SOEs and public-benefit SOEs. Further analyses suggest that firm size, age, sales growth, ownership concentration, government subsidies, and industry monopoly factors cannot explain this phenomenon. The common driver for all types of SOEs to generate stronger free cash flows than non-SOEs is their stronger expense control capability.

This paper uses a dataset of more than 100,000 firms over the period of 2000-07 to assess whether and why Chinese firms overinvest. We find that corporate investment in China has become increasingly efficient over time, suggesting that overinvestment has been declining. However, within all ownership categories, we find evidence indicating a degree of overinvestment by firms that invest more than the industry median. The free cash flow hypothesis provides a good explanation for China’s overinvestment in the collective and private sectors, whereas in the state sector, overinvestment is attributable to the poor screening and monitoring of enterprises by banks.

We examine the impact of corporate ownership structure on the value of excess cash in Chinese listed firms. We find that the value of excess cash is less in firms controlled by private investors than in those firms controlled by the government. One dollar of excess cash is valued a $0.36 in firms controlled by private investors while it rises to $0.42 in firms controlled by the government. Furthermore, we show that the expropriation of the controlling shareholders is significantly and positively related with the previous year’s excess cash in firms controlled by private investors while it is insignificant in firms controlled by the government. These findings are consistent with the view that private controlling shareholders have the greater ability to extract private benefit in cash holdings.

Various studies have been done on wealth effects and financial performance of firms in different countries but have yielded mixed results. Data on completed deals of Cross-border Mergers and Acquisitions (CBMAs) comprising public listed firms with more than ten percent of share acquisition in five East Asian countries were analysed using event study and key financial ratios. Although the results for average abnormal returns in Indonesia and Korea were inconclusive, the results for Malaysia, Thailand and the Philippines suggest that the market had reacted positively adding value to the target firms at merger announcements. There was a significant improvement in targets’ free cash flow after CBMAs when compared to both before CBMAs and also control firms after CBMAs. The results also reveal that that these five East Asian countries have moved towards more efficient markets.

Manuscript Type: Empirical Research Question/Issue: This study intends to solve the disputes between the free cash flow hypothesis and the tunneling hypothesis in explaining the role of cash dividends on asset expropriation of the controlling shareholders in Chinese listed firms, by investigating the values of cash holdings and cash dividends between firms with high and low ownership control. Research Findings/Insights: The results show that investors value more the cash dividends of firms with high ownership control than those of firms with low ownership control, and value more the cash holdings of firms with low ownership control than those of firms with high ownership control, more consistent with the free cash flow hypothesis rather than the tunneling hypothesis. Theoretical/Academic Implications: This study contributes to the literature of agency theory and international corporate governance by solving the disputes regarding the role of cash dividends in asset expropriation of controlling shareholders in Chinese listed firms. This study also contributes to the literature of cash holdings by showing that the most essential condition for these firms to hold high level of cash holdings is the quality of investor protection. This provides an example of the applicability of the Anglo-Saxon theory to emerging markets. Practitioner/Policy Implications: Even though the evidence does not support the tunneling hypothesis of cash dividends, it still suggests that investors are concerned with high cash payouts, which could thus lower firm value. Thus, changing corporate ownership structure and improving investor protection are necessary to deepen the development of financial markets.

We examine the effects of government ownership on the change in valuation and the uses of proceeds of firms after they raise equity funds – the time when the agency problems of free cash flows are larger. We find that investors generally react more negatively to an equity offering decision by a company whose government ownership is higher. Firms generally increase cash dividend payments after offering equity, and firms with extremely high government ownership increase cash dividends more than other firms do. Further analysis shows that investors react more negatively to an offering decision if they expect the issuer to increase cash dividends post-offering. Our study suggests agency problems exist in equity offerings in China, and firms tunnel resources by offering shares to the public followed by an increase in cash dividends.