This paper explores reasons for the excess sensitivity of (under- or over-) investment to free cash flow. Using accounting information from Chinese listed firms, we find robust support for the fact that higher sensitivities of abnormal investment to free cash flow can be caused by financial...

This paper attempts to address a puzzle in China’s investment pattern: despite high aggregate investment and remarkable economic growth, negative net investment is commonly found at the microeconomic level. Using a large firm-level dataset, we test three hypotheses to explain the...