Firm investment and financial autonomy: A transaction cost economics and firm lifecycle approach

This study examines how firm's investments relate to financial autonomy across different stages of lifecycle. With 1367 Chinese listed companies from 1990 to 2018, the results indicate that firms with high (low) financial autonomy tend to over-invest (under-invest). Accordingly, financially autonomous firms have lower valuation. While corporate governance mitigates both over- and under-investment over time in China, such an effect becomes statistically insignificant after considering different magnitudes of financial autonomy. The Chinese policy makers should consider designing more solid corporate governance to control the opportunism of managers who are more financially independent.