Do Investments in Mainland China Affect Firm’s Sensitivity of Cash Flow?
Date Issued
2006
Date
2006
Author(s)
Liang, Shiun-Wen
DOI
en-US
Abstract
There is a saying by foreign institutional investors in Taiwan that in a few years Taiwan listed stocks will be all “China-concept” stocks, since no firms can survive without switching manufacturing to China.
The main purpose for this research is to examine whether or not China-concept firms and non-China-concept firms will exhibit different extent of investment sensitivity to cash flow. By definition, China-concept firms are firms that are listed on the Taiwan stock market and have real investments in China. We use the Fazzari, Hubbers and Peterson (1988) methodology and collect firms’ data for the 1998-2004 period.
We find strong evidence that China concept firms have lower sensitivity to cash flow than non-China concept firms. At the same time, we have evidence to show that in average China concept firms in the low dividend payout firms group tend to have higher investment sensitivity to cash flow, while high dividend ones are less sensitive. There is little evidence that China concept firms in the electronic industry have lower sensitivity to cash flow.
One of the reasons may be that China concept firms don’t finance the investment through the parent company, instead they finance through oversea branches, paper companies, or venture capital. This is mainly because Taiwan’s regulations limit the total amount invested in Mainland China. Another explanation is that parent company may use rebate as a source of investment capital.
As for the industry difference, we think it is mainly because China considers the high-tech industry to be important to science and technology development, therefore the local governments provide numerous incentive programs and cheaper labor. Hence, electronic firms won’t need to retain more internal cash to finance future investment projects.
Subjects
融資限制
China Concept Stock
Financing constraints
Type
thesis
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