Skip to main content

Management pay-performance sensitivity, internal cash flow and investment behavior: A test of the free cach flow theory and asymmetric information theory


The relationship between investment and financing, the two basic components of corporate finance, is of significant interest to researchers and practitioners alike. The free cash flow hypothesis and asymmetric information hypothesis are two important theories to explain the relationship between investment expenditure and cash flow. In this paper, we examine how consistency between the interests of management and shareholders influences investment-cash flow sensitivity, and how the nature of the controlling shareholder influences this relationship, so as to analyze how much the free cash flow hypothesis and asymmetric information hypothesis can explain the practice of investment and financing in China. We use pay-performance sensitivity as a proxy for the degree of consistency between shareholders and management interests. We find that investment-cash flow sensitivity is affected not only by financial constraints that caused by asymmetric information, but also by the shareholder-manager agency problem. It is found that the asymmetric information theory has more explanatory power than the shareholder-manager agency theory. In addition, the relationship between investment-cash flow sensitivity and pay-performance sensitivity is affected by the nature of controlling shareholders. Specifically, in the state-owned enterprises, the investment-cash flow sensitivity is mainly ascribed to information asymmetry problems, but in the non-state-owned enterprises, the investment-cash flow sensitivity mainly results from free cash flow.


作为企业理财行为中的两大重要组成部分, 企业投资和融资行为之间的关系一直备受理论与实务界人士的关注。 自由现金流假说和信息不对称假说是解释企业投资支出与现金流之间关系的两种重要理论。 我们考察了管理层与股东利益的拉近程度对投资现金流敏感度的影响, 以及控股股东性质对这一关系的影响, 从而分析了自由现金流假说和信息不对称假说对我国企业融投资行为的解释力。 我们用业绩报酬敏感度作为管理层与股东利益接近程度的衡量指标, 发现投资现金流敏感度不仅受到内外部信息不对称导致的融资约束的影响, 而且受到了股东-经理代理问题的影响, 但是信息不对称理论的解释力度相对较强。 另外, 投资现金流敏感度和管理层业绩报酬敏感度之间的关系受到公司控股股东所有权性质的影响。 具体讲, 在国有控股公司中, 投资现金流敏感性主要是由于信息不对称问题引起的, 而在非国有控股公司中, 投资现金流敏感性主要是由于自由现金流问题引起的。


  1. Broussard J, Buchenroth S A, Pilotte E A (2004). CEO Incentives, cash flow, and investment. Financial Management, 33(2): 51–70

    Google Scholar 

  2. Chow C K, Fung M K (2000). Small businesses and liquidity constraints in financing business investment: Evidence from Shanghai’s manufacturing sector. Journal of Business Venturing, 15: 363–383

    Article  Google Scholar 

  3. Chung K H, Stephen W P (1994). A simple approximation of Tobin’s Q. Financial Management, 23(3): 70–74

    Article  Google Scholar 

  4. Cleary S (1999). The relationship between firm investment and financial status. Journal of Finance, 54(2): 673–692

    Article  Google Scholar 

  5. Fazzari S M, Hubbard R G, Petersen B C (1988). Financing constraints and corporate investment. Brookings Papers on Economic Activity, (1): 141–95

  6. Fazzari S M, Petersen B C (1993). Working capital and fixed investment: New evidence on financing constraints. RAND Journal of Economics, 24(3): 328–342

    Article  Google Scholar 

  7. Gilchrist S, Himmelberg C P (1995). Evidence on the role of cash flow in reduce-form investment equations. Journal of Monetary Economics, 36: 541–572

    Article  Google Scholar 

  8. Hadlock C J (1998). Ownership, liquidity and investment. RAND Journal of Economics, 29(3): 487–508

    Article  Google Scholar 

  9. Holmstrom B (1979). Moral hazard and observability. Bell Journal of Economics, 10(1): 4–29

    Article  Google Scholar 

  10. Hoshi T, Kashyap A, Scharfstein D (1991). Corporate structure, liquidity, and investment: Evidence from Japanese industrial groups. Quarterly Journal of Economics, 106(1): 33–60

    Article  Google Scholar 

  11. Hubbard R G (1998). Capital-market imperfection and investment. Journal of Economic Literature, 36(1): 193–225

    Google Scholar 

  12. Jensen M (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review Papers and Proceedings, 76(2): 323–329

    Google Scholar 

  13. Kaplan S N, Zingales L (1997). Do investment-cash flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics, 112(1): 169–215

    Article  Google Scholar 

  14. Lamont O A (1997). Cash flow and investment: Evidence from internal capital markets. Journal of Finance, 52(1): 83–109

    Article  Google Scholar 

  15. Modigliani F, Miller M (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48(3): 261–297

    Google Scholar 

  16. Myers S, Majluf N (1984). Corporate financing and investment decisions when firms have information those investors do not have. Journal of Financial Economics, 13: 187–221

    Article  Google Scholar 

  17. Oliner S D, Rudebusch G D (1992). Sources of financing hierarchy for business investment. The Review of Economics and Statistics, 74(4): 643–654

    Article  Google Scholar 

  18. Pawlina G, Renneboog L (2005). Is investment-cash flow sensitivity caused by the agency costs or asymmetric information? Evidence from the UK. Working Paper, European Corporate Governance Institution

  19. Vogt S C (1994). The cash flow/investment relationship: Evidence from US manufacturing firms. Financial Management, 23(2): 3–20

    Article  Google Scholar 

  20. 冯 巍 (Feng Wei) (1999). 内部现金流和企业投资: 来自我国股票市场上市公司财务报告的证据 (Internal cash flow and corporate investment: The evidence from the financial reports of listed companies in China’s stock market). 经济科学, (1): 51–57

  21. 何 金耿, 丁 加华 (He Jin’geng, Ding Jiahua) (2001). 上市公司投资决策行为的实证分析 (Empirical analysis on investment decision making behaviors of listed companies). 证券市场导报, (9): 44–47

  22. 李 增泉 (Li Zengquan) (2000). 激励机制与企业绩效: —项基于上市公司的实证研究 (Incentive mechanisms and firm performance: an empirical study on listed company). 会计研究, (1): 24–30

  23. 刘 曼红 (Liu Manhong) (2003). 中国中小企业融资问题研究 (Research on Financing of Middle and Small Enterprise). 北京: 中国人民大学出版社

    Google Scholar 

  24. 宋 德舜 (Song Deshun) (2004). 国有控股、 最高决策者激励与公司绩效 (State holding, incentives of top decision-maker and firm performance). 中国工业经济, (3): 91–98

  25. 魏 刚 (Wei Gang) (2000). 高级管理者激励与上市公司业绩 (Top management incentive and performance of listed company). 经济研究, (3): 32–39

  26. 徐 晓东, 陈 小悦 (Xu Xiaodong, Chen Xiaoyue) (2003). 第一大股东对公司治理、 企业业绩的影响分析 (Analysis on the largest shareholders impact on corporate governance and performance). 经济研究, (2): 64–74

  27. 张 俊瑞, 赵 进文, 张 建 (Zhang Junrui, Zhao Jinwen, Zhang Jian) (2003). 高级管理层激励与上市公司经营绩效相关性的实证分析 (Empirical analysis on the relevance of top management incentives and the performance of listed companies). 会计研究, (9): 29–34

  28. 张 翼, 李 辰 (Zhang Yi, Li Chen) (2005). 股权结构、 现金流与资本投资 (Ownership, cash flow and investment). 经济学季刊, (1): 229–246

  29. 郑 江淮, 何 旭强, 王 华 (Zheng Jiangwei, He Xuqiang, Wang Hua) (2001). 上市公司投资的融资约束: 从股权结构角度的实证分析 (Financial constraints in the listed companies investment: Explanation from the views of structure of equity). 金融研究, (11): 92–99

  30. 周 立 (Zhou Li) (2002). 自由现金流代理问题的验证 (Test of free cash flow problem). 中国软科学, (8): 43–47

Download references

Author information



Corresponding author

Correspondence to Pan Tong.

Additional information

Translated and revised from Kuaiji Yanjiu 会计研究 (Accounting Research), 2007, (10): 73–81

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Zhi, X., Tong, P. Management pay-performance sensitivity, internal cash flow and investment behavior: A test of the free cach flow theory and asymmetric information theory. Front. Bus. Res. China 3, 413–431 (2009).

Download citation


  • pay-performance sensitivity
  • investment-cash flow
  • free cash flow
  • asymmetric information


  • 业绩报酬敏感度
  • 投资现金流敏感度
  • 自由现金流
  • 信息不对称