Institutional Environment and Overinvestment in Emerging Markets-Empirical Evidence from Chinese Listed Companies

Abstract

We use China’s unique institutional environment as a basis to study the country’s enterprise overinvestment behavior. In recent years, China has seen a surge in enterprise investment due to the huge availability of investment funds leading to difficulties in governing listed firms in the country. We separately analyze the impact of government intervention, rule of law and financial development of various regions on the overinvestment behavior of the listed companies. The results show that government intervention is positively related to overinvestment of listed companies. However, rule of law and financial development are negatively related to overinvestment of listed companies. In addition, the results further show that improved institutional environment can restrict overinvestment in listed companies. Further research indicates that, compared to the rule of law and financial development, government intervention is a fundamental factor which influences overinvestment the most. The study’s results have implications, particularly for the regulators, as they provide useful and detailed information which can be used in the design of more appropriate and functional systems to govern listed companies and help in curbing the overinvestment problem.

Keywords: Government intervention; rule of law; financial development; overinvestment, Emerging Markets