Entrusted investment in China: Firm characteristics and economic consequences

Using a large sample of China's listed firms from 2001 to 2018, we investigate the determinants and consequences of entrusted investment in China. We find that firms with more idle funds and weaker corporate governance are more likely to engage in entrusted investment (EI). We also find that the stock market reacts positively to entrusted investment announcements. Further, EI improves short-term firm performance but has no effect in the long run. One possible reason is that EI reduces corporate R&D investment, which may have a negative impact on long-term performance. Finally, we find that the positive association between EI and short-term firm performance becomes more significant for firms without overseas experienced executives and non-high-tech firms. This study enriches the literature on the EI and corporate finance, and the findings have important implications for regulators, listed firms, and investors.