Does Refinancing Regulation Promote Rational Investment？ Evidence from Listed Companies in China
QIN Jiaqi, YANG Xue, CHEN Yan, SUN Lingxia
Business School, Nankai University; School of Accountancy, Shandong University of Finance and Economics; International School of Business & Finance, Sun Yat-sen University
Summary:
Since the implementation of the current refinancing system in 2006, its development in practice has been different from originally expected.It is undeniable that refinancing regulation has the power to immediately change the status quo. However, in the long run, the current refinancing system is defective, and means that companies' investment and financing practices are consistently unable to achieve a balance between government regulation and marketization. This paper attempts to understand whether China's refinancing regulation encourages efficient capital allocation, and to explore how to balance regulation and marketization by answering three questions.Is there market discipline in China's current market？ Has refinancing regulation effectively protected or promoted market discipline？ If not, why not？ As the funds raised by firms are mainly used for investment, this paper focuses on corporate investment. Based on the Modigliani-Miller(MM)investment theory, we take whether investment is constrained by the cost of capital as a measure of the rational investment. A dynamic panel model and system GMM regression are adopted. First, this paper examines the correlation between investment and cost of capital to determine whether investment decisions conform to the rational criteria of MM investment theory and indicate the existence of market discipline. Second, it examines the effect of refinancing events on the relationship between investment and cost of capital to determine whether regulation can protect market discipline. Finally, it examines the mechanism by which refinancing regulation influences market discipline from two perspectives: refinancing motivation and changes in fundraising direction. Using the financial statement data, stock trading data, and statement notes of A-share listed companies from 2007 to 2016 in the CSMAR database and Wind database, this study makes the following findings. (1) The investment of listed companies is negatively correlated with the cost of capital, indicating that their investment decisions are in line with the criterion of rationality; thus, market discipline exists in China's market.(2) The constraints on investment after refinancing are weakened, which indicates that the refinancing regulation undermines rather than strengthens the binding effect of the market on corporate investment. (3) There are two defects of refinancing supervision that decrease rational investment: the neglect of pre-refinancing motives and lax regulation of the use of funds. The use of alternative variables, ordinary least squares estimation, propensity score matching, and the differences-in-differences method does not change these results. Further analysis is performed to investigate total factor productivity and share-based payment in asset reorganization to further support the study's findings. Based on these conclusions, this paper puts forward the following suggestions for improving government regulation and reshaping the refinancing market. The first is to emphasize the concept of cost of capital in regulatory efforts to protect investors. The second is to improve the control parameters for refinancing qualification. The third is to pay more attention to ex-post supervision, and to focus on monitoring listed companies that have just raised funds to reduce waste and the misallocation of funds at the project level. The main contributions of this paper are as follows. First, the market discipline of cost of capital is emphasized, and more evidence is found to support the MM investment theory. Second, unlike the existing literature, which focuses only on performance or the dividend threshold, this paper embeds government regulation in the market mechanism of investment and cost of capital, providing support for the regulatory limitations and further extending this viewpoint to identify two defects of current refinancing policies. Third, this paper not only makes clear the necessity and limitations of the current regulations, but also provides inspiration to regulators and investors about optimizing refinancing regulation and reshaping corporate refinancing activities.
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