The short- and long-term impacts of overinvestments on the profitability of agri-food processing firms in China

This study examines the short- and long-term impacts of overinvestments on the profitability of Chinese agri-food processing firms. We construct an overinvestment age variable measured as the number of years since the most recent overinvestment and use a two-way fixed effects model based on firm-level data for the Chinese agri-food-processing industry from 1998 to 2013 to conduct the research. We find that the profitability of firms improves during the first and second years following the most recent overinvestment. However, from the third year onward, profitability declines, and the restraining effect increases year by year. In addition, we find that regional differences and differences in financing constraints can explain the heterogeneity of the overinvestment age affecting firm profitability. [EconLit Citations: D22, L25, L66].