Title: Recasting investment efficiency in China: A semiparametric stochastic efficiency investment panel model
Authors: Taining Wang - Capital University of Economics and Business (China)
Feng Yao - West Virginia University (United States)
Taining Wang - Capital University of Economics and Business (China) [presenting]
Abstract: A semiparametric model is proposed for investment efficiency analysis with three advantages over conventional models. First, our model distinguishes the cause of investment inefficiency due to underinvestment (by financial constraints) from that due to overinvestment (by agency costs). Furthermore, we assume firms make one single decision by choosing under, over, or efficient investment with probabilities influenced by financial friction variables. These are absent features in existing models, which either explicitly assumes the absence of agency costs or implicitly assume an infeasible scenario where underinvestment and overinvestment appear simultaneously. Second, our model is not restricted by parametric specifications widely imposed in existing models, thus alleviating the risk of rendering misleading inferences on investment inefficiency due to model misspecification. Third, our model disentangles fixed effects from investment inefficiency, and circumvents incidental parameter problems through model transformation. We apply our model to investigate investment inefficiency using a panel of Chinese-listed firms during 2006-2020. Both inefficient investments in firms with different ownerships are, on average, persistent and even intensified over the past 15 years.