Stock Price Informativeness, Free Cash Flow and Overinvestment: A Chinese Study

Wurgler (2000) first show how firm-specific information affect the allocation of capital at the country level. I first show how stock pirce informativeness affect overinvestment of free cash flow at the firm level. This paper studies the relationship of stock pirce informativeness and overinvestment on a sample of China´s listed companies from manufacturing industry between 2001 and 2008. Empirical results show that, the overinvestment caused by free cash flow decreases significantly with increasing stock pirce informativeness. The empirical results also strongly support the point that more informative stock price facilitate more efficient capital allocation.