The role of the stock market in influencing firm investment in China.

摘要

This dissertation seeks to make a contribution to the recent discussions on the role of stock market development in economic growth. It conducts an empirical study of the economic impact of stock market expansion in China with a focus on the links between the stock market and firm investment. It is based on a panel data set constructed by the author of all Chinese listed firms for the time period from 1992 to 1999. This data set is modeled on and comparable to the COMPUSTAT database in the US. Utilizing this data set, I investigate the effects of the stock market on firm-level investment. The main findings are twofold. On the one hand, by applying both fixed effects and generalized method of moments (GMM) techniques to a modified Trobin's q theory of investment, I find that in China, stock market valuations have a highly significant and positive influence on listed firms' investment decisions, particularly during the stock market boom from 1996 to 1999. On the other hand, the results based on the present-value model show that valuations on the Chinese stock market do not correspond to underlying fundamentals. Stock valuations are especially out of line with firm fundamentals during the market expansion years from 1996 to 1999. These findings suggest that while the stock market in China has played an increasingly important role in guiding investment activities, the recent stock market expansion in China is likely to produce inefficient allocation of investable resources and cause detrimental effects on the real economy. As a result, this study supports the view that great caution must be exerted in relying on the stock market as an effective mechanism for directing investment funds in China. It proposes that a carefully thought out regulatory framework should be implemented in China in order to make best use of the stock market.