Public Transfer of Equity and Enterprise Investment Efficiency: Evidence from China

Abstract

Using the full-scale implementation of the National Equities Exchange and Quotations in China in 2013 as a quasi-natural experiment, this study explores the effect of public transfer of equity on the investment efficiency of micro, small and medium-sized enterprises (MSMEs). We find that public transfer of equity improves the investment efficiency of MSMEs. Further analysis shows that public transfer of equity mainly promotes the investment efficiency of MSMEs by the improved governance mechanism rather than the improved financing mechanism. Specifically, public transfers mainly improve overinvestment and reduce new investment in MSMEs, and this promotion effect is more pronounced in MSMEs with weak financing constraints and poor governance. Evidence from the tax avoidance suggests that enhanced regulation due to public transfers of equity is unlikely to be the source of governance enhancement in MSMEs. Overall, this study provides reference for the development of emerging capital market and resource allocation in MSMEs by revealing the sources of inefficient investment in MSMEs that are different from those in mature enterprises and the positive role of capital markets in guiding investment in MSMEs.

Keywords: public transfer of equity, investment efficiency, financing constraints, corporate governance