Difference on Capital Allocation and Operating Performance—Evidence from China Listed Companies

Abstract

The neoclassical theory of investment has been developed to explain, in a perfect market, the investment decision of a company depends on the net present value of a project, and its expenditure is determined only by the set of investment opportunities, and independent of other factors. However, in reality, other factors influence investment mostly. For the full sample of China listed companies, capital allocation is consistent with operating performance. Controlling property rights of the enterprises, we show that various kinds of investments in state-owned listed companies are inconsistent with operating performance, but non-state-owned listed companies reflect effective investment. In the long run, deepening classified reform of state-owned enterprises is extremely demanded.