The purpose of this study is to analyze the effect of financial constraints on
sensitivity of investment to cash flow for the Chinese listed manufacturing
companies from 2000 to 2009. The endogenous switching regression model
based on Tobin’s q theory is used. The estimation result indicates that a
company belonging to high premium regime has a higher sensitivity of
investment to cash flow for all cases. In addition, the result shows that under
the same regime, the sensitivity of investment to cash flow depends on the
ownership structure. While a private company is more likely to be included in
high premium regime than a state-owned company, state-owned company’s
sensitivity of investment to cash flow is higher than that of private company in
case of high premium and low premium regime respectively. It implies that
Chinese listed state-owned companies spend more surplus cash flow on
investment.