The impact of shareholding structure on firm investment: Evidence from Chinese listed companies

• We examine whether ownership affects the way in which capital investment responds to cash flows.
• We find sensitivity of investment to internal funds associated with Chinese firms that have low level of shareholding concentration.
• We find sensitivity of investment to internal funds associated with Chinese firms that have large proportion of state shares.
• We find sensitivity of investment to internal funds associated with Chinese firms that have low proportion of publicly owned shares.
• We explain this as the impact of both liquidity constraints and corporate governance issues.

This paper examines the impact of shareholding concentration and the class of shareholders on firm investment. We apply the Euler equation approach to the empirical modeling of investment for a panel dataset of 786 Chinese listed companies during 1998–2004. We find that a significant positive sensitivity of investment to internal funds is associated with firms that have a low level of shareholding concentration, large proportion of state shares and low proportion of publicly-owned shares. We find that cash flow is insignificant for high levels of legal person or public shareholding. We interpret this in the context of the impact of both liquidity constraints and corporate governance issues.