Paper:: Summarize Related Literature Review and Hypothesis Group 12

SUMMARIZE RELATED LITERATURE REVIEW AND HYPOTHESIS
GROUP 12 :
 TRẦN THỤY YẾN THU BAFNIU17051
 NGUYỄN VÕ HÀ PHƯƠNG BAFNIU17032
 NGUYỄN BẢO NGỌC BAFNIU17016
 NGUYỄN HOÀNG THIÊN NHÃ BAFNIU17067
PAPER:
Product market competition and corporate investment: Evidence from China
This paper begins by showing that that domestic corporate investment decreases in the face of
global competition by another paper. Specifically, Mello and Wang (2012) and Frésard and
Valt 2015) all find that there is a negative relationship between competition and investment.
But this paper’s research takes the other perspective of these findings into account. Chinese
firms lost much of the investment opportunity in the US. After liberalization, Chinese firms
also faced greater competition from regional countries but also experienced the great
potential for growth when exporting to developed countries.
They find that firms in an environment of high and predictable growth will invest sooner in
the face of high competition trying to preempt their own first-mover advantage. Hence, they
test the hypothesis that investment and competition in high and predictable growth are
positively correlated. Especially, they study the relationship between product market
competition and corporate investment in China which country has experienced rapid growth
and large annual economic growth rate after its transition from a state-controlled economy to
a market-oriented one. Because of China’s significant and consistent economic growth, China
is an ideal setting for testing the hypothesis that that relation in a growing economy is
positive.
They find lots of evidence that is consistent with their hypothesis that the relationship
between investment and competition is positive.
First, based on a sample of Chinese manufacturing firms listed during 1999–2010, they find a
positive relation between corporate investment (measured as the change in net fixed assets
plus depreciation) and product market competition (proxied by three different measures: the
Herfindahl–Hirschman Index (HHI), the number of firms in the industry (N), and a
concentration ratio of the four largest firms in the industry (CR4)).
Second, causality may be in the opposite direction, as corporate investment can affect the
level and nature of the industry's product market competition (e.g., Spence, 1979). Based on a
quasi-natural experiment, Chinese manufacturing firms tend to increase investment in the
face of rising competition, consistent with their hypothesis.
Third, it is also possible that our cross-sectional analysis on competition and investment may
yield biased results due to omitted firm level variables that are constant over time. They again
find a positive relation between investment and competition.
Fourth, they argue that the competition-investment relationship is positive in China because
of its tremendous and predictable and thus profit opportunities.. Overall, they find that firms
do invest more when the firm, its industry, its province, and the country have higher growth
rates.
Fifth, they find that firms that invest more under high competition indeed subsequently
experience better firm performance. Therefore, the high level of investment in which firms
engage when competition is high is indicative of high NPV opportunities and low wait option
values. Hence, firms will invest more under high competition in a growing economy to
capture as much of the growth opportunities as possible.
Sixth, however, they recognize that in spite of predictable growth opportunities, some firms
may not invest more under high competition despite the profit potential that growth
opportunities provides. Therefore, they identify firms with high cash ratios. Overall, they find
that firms with higher predation risk and more cash invest more when competition is high.
That is, when the risk of losing market share is high, especially under high competition, firms
invest more.
In addition, they consider the firm's position in its industry. Autor et al. (2013) and Frésard
and Valta (2015) find a negative relation between competition and investment in developed
markets. However, in China's environment of high growth, leaders are best positioned to
capture investment opportunities. Overall, they find that the positive relation between
competition and investment is stronger for leader firms and for large firms, consistent with
their contention.
In brief, this paper reveals a clear positive relationship between product market competition
and corporate investment. They believe that this strong relation occurs when firms ample and
predictable growth opportunities. Therefore, by defining an environment (i.e., an economy
experiencing high growth) where the relation is strongly positive, they make a significant
contribution to the literature on product market competition and corporate investment. This
paper contrasts what Mello and Wang (2012), Autor et al. (2014), and Fresard and Valta
(2015) considered to have occurred during this time in developed countries. In a way, their
paper from the research is “the other side of the coin”.
Do state and foreign ownership affect investment efficiency? Evidence from

privatizations
This paper shows 3 parts in the literature review and hypothesis:
1.Determinants of Investment Efficiency:
The company's investment may deviate from the optimal level because of capital market
friction. Asymmetric information and agency issues are the two main friction tested in
investment literature. Information asymmetric models imply that information asymmetry
between managers and investors leads to poor investment. Agent models show that managers
are self-interested and sometimes act not for the interests of shareholders, resulting in a lack
of investment efficiency. In summary, the influence of state and foreign institutional
ownership on the sensitivity of investment spending on investment opportunities and the two
different ownership forms on both information asymmetry and agencies problem, resulting in
different investment behaviors.
2.State Ownership and Investment Efficiency:
The biggest problems related to state ownership are ineffective. They have two theories to
argue: information asymmetry and agency issues, and these have the potential to distort
company investment, resulting in inefficient investments.
Empirical evidence from the privatization literature shows a significant improvement in
performance and governance after SOE divestments, but when the government continues to
be the majority owner after privatization, that is, without giving up control, the improvements
become stagnant. Based on the above discussion, they predict that state ownership in NPF is
negatively related to investment performance.
3.Foreign Ownership and Investment Efficiency:
Foreign institutional investors are involved in improved investment efficiency because they
help minimize information asymmetry and agency issues in NPF through two channels:
monitoring and information.
Monitoring channel, institutional investors are expected to exercise strong corporate
governance to protect their investment. As for information channels, institutional investors
are better able to collect and process information thanks to their superior investment
experience and expertise and therefore to be better informed than other investors that help
reduce information asymmetric issues. From empirical studies and discussions leads to the
conclusion that: Foreign ownership in NPF is positively related to investment efficiency.
How does analysts' forecast quality relate to corporate investment efficiency?

1.Management incentives, availability of capital, and investment efficiency: The reasons for
the ineffective investment may be due to the conflict of interest between management and
shareholders and the main constraints faced by the company. The negative impact of moral
hazard and the problem of adverse selection for the investment efficiency can be reduced by
improving the information environment of the company and effective monitoring is done by
shareholders, financial institutions and other stakeholders.
*The adverse selection problem: When the company's insider ownership information
superiority on the real value of the company and have the incentive to release capital is too
high or issued capital when the company was overvalued. However, with limited information,
external capital suppliers can be suspicious and respond by increasing the company's external
financial costs. The problem of adverse selection not only affects equity financing, but also
debt financing, for which lenders, who possess less information than borrowers, will require a
higher cost of debt that squeezes out “good borrowers”.
*The principal-agent conflict or moral hazard problem: most of this is due to the difference
between managerial incentives and shareholder interests. Instead of enriching shareholders,
managers have other privacy goals, arrogance and inconsistency of managers and thus lead to
inefficient investments.
2. Analyst forecast quality and investment level: Information intermediary and monitoring
agent review : A timely and transparent information environment and an effective monitoring
mechanism can help prevent managers from making investment decisions that deviate from
the optimal level, and that is also the function of analysts. There is a large body of literature
documenting the roles of financial analysts as intermediaries of information between
companies and investors.
*Financial analysts have an information advantage by providing both public and private
information to individuals and institutional investors.
*Financial analyst forecasts help minimize information asymmetry between insiders of the
company and external capital suppliers and between managers and shareholders.
*Expert analysis from external analysts is expected to play a monitoring role that helps to
increase the investment efficiency of firms by constraining management from making
suboptimal investments and reducing firms' cost of capital.
Based on the above views, they hypothesize that, analyst forecasts provide valuable
information on and monitor firms' investment activities, leading to higher investment
efficiency of firms. Specifically, we expect that the quality of
analyst earnings forecasts help to reduce over- and under-investment by firm and we form the
following hypothesis:
+analysts' forecast quality is positively associated with investment efficiency
+analysts' forecast quality is negatively associated with investment efficiency.
3. Analyst forecast quality and investment level: market pressure view

When stock prices fall and do not meet market expectations, the managers of these
companies experience reduced compensation, a greater likelihood of turnover and loss of
reputation. Therefore, analysts are expected to put pressure on regulators or defeat income
standards, which could give rise to adverse effects such as short-termism and behavior
opportunity
Financial reporting quality, debt maturity and investment efficiency
Based on these premises, the main purpose of this paper is to combine these two mechanisms
and analyze the effect of financial reporting quality (FRQ) and debt maturity on investment
efficiency and where short-term debt is the major source of external finance. In relation to the
role of debt maturity in investment efficiency, to the best of our knowledge this is the first
study that empirically examines its effect on both underinvestment and overinvestment. The
higher information asymmetry, private debt is the main source of finance for Spanish firms,
where banks may play a role in alleviating capital market imperfections and the monitoring
role of short-term debt is higher. Actually, the debt maturity structure of companies presents
short-term orientation. From the lender’s perspective, a role as a control device of
management performance, and from the borrower’s side they facilitate undertaking positive
net present value projects, they also expect a positive association between shorter maturities
and investment efficiency. They could expect both effects: on the one hand, the reduction of
information asymmetry and more reliable accounting numbers, due to higher FRQ, could add
to better monitoring due to short-term debt and, as a consequence, the effect of FRQ on
investment efficiency should be higher for firms with higher FRQ and shorter maturities. On
the other hand, in firms with higher FRQ, lenders will have less need for shorter maturities to
monitor managers’ behavior, so under this assumption they would expect the importance of
FRQ to reduce information asymmetries will increase with longer maturities and will
decrease with shorter maturities. They use an aggregate measure that includes the previous
three proxies. The FRQ reduces overinvestment, while shorter debt maturity mitigates
overinvestment and underinvestment. Beside that the effect of FRQ on investment efficiency
decreases with shorter maturities, suggesting a substitutive role of FRQ and shorter maturities
in reducing information asymmetries and monitoring managerial behavior to limit
expropriation of creditors and minority shareholders. Our paper contributes to a growing
body of literature providing empirical evidence on FRQ and debt maturity roles in improving
investment efficiency.

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SUMMARIZE RELATED LITERATURE REVIEW AND HYPOTHESIS

Do state and foreign ownership affect investment efficiency? Evidence from

How does analysts' forecast quality relate to corporate investment efficiency?

3. Analyst forecast quality and investment level: market pressure view

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