Stock Price, Equity Dependence and Corporate Investment: Evidence from China

Empirical findings from Baker, Stein and Wurgler(2003) for the sample of U.S. firms and Wei, Yuanto (2006) for an international sample of 42 countries (except China) suggest that corporate investment is positively correlated with stock prices. Following Baker et al. (2003), we investigate the relationship between corporate investment and stock prices in the capital market in China on a sample period of 10 years. However, we get a surprising finding that stock prices have little effect on corporate investment, which is different from Baker (2003) and Wei (2006)'s, but similar to the performance of U.S. in 1920s, and supports the notion that the stock market is just a sideshow. It's probably an interim phenomenon in course of reformation in China. Simultaneously, we corroborate the positive effect of cash flow on corporate investment, which is consistent with the result of Baker et al. (2003).