Investment Cash Flow Sensitivity and Effect of Managers’ Ownership: Difference between Central Owned and Private Owned Companies in China

Based on panel data of the listed companies in China’s stock market A during a period of year 2007 - 2010, we made an empirical study on what drives the investment cash flow sensitivity and theeffect of management’s ownership and boththeir differences between the central stateowned companiesand then on-stateowned companiesas well.The sensitivity of investment to internal cash flow in China’scentralstate-owned companies can be explained by“hypothesis of free cash flow”It is the cost of agency that causes over-investment behaviors ,and the management’s ownership appears significant enhancement effect rather thanentrenchment effect. However,the sensitivity of investment to internal cash flow in China’s non-state owned companies supports the explanation of“hypothesis of financial constraints”.A symmetrical information causesunder- investment behaviors of the firms.In the mean while,the entrenchment effect of manages’ ownership dominates the enhancement effect in non-state owned companies