Do Firms Care About Investment Opportunities? Evidence from China.

What drives a firm's investment decisions in China? While most literature focuses on the role of financial factors (such as cash flow), we explore this most important question in corporate finance from the perspective of economic fundamentals. Empirical results show that private firms cherish investment opportunities more in China. State-owned enterprises respond more to the investment opportunities from the supply side, but much less so to demand-side shocks. These findings provide interesting policy implications for China's on-going ownership and financial sector reforms.