The Effect Of Asset Substitution And Under-investment Of Debt Financing And Its Empirical Test

The core point in modern enterprise theory says,enterprise is an organic combination of a series of incomplete contracts.Shareholders,creditors and enterprise managers,which involved in the contract is a kind of principal-agent relation.In most enterprises,the agency problem not only exists between shareholders and managers,but also exists between shareholders and creditors.The objective function of shareholders and creditors is different,their interests of both objective is to maximize the value of equity and debt value maximization.Shareholders are the owners of the company,he own the residual control right,and pay attention to the net profit,return on equity and earnings per share.Creditors unable to participate in the operation and management,they pay attention to the solvency of the company.The different goals of the shareholders and creditors led to the agency problem,including Jensen and Meckling(1976)proposed asset substitution or risk transfer problems,and Myers(1977)proposed the under-investment problem.The existence of agency problems,causes the company to make sub-optimal investment decisions,influencing the full play of the resource allocation function in capital market,and even hinder the marketization process of the enterprise.By choosing a high-risk investment projects,the shareholders who take control of the enterprise can improve the actual risk level of the creditors,reduce the value of the debt,so as to achieve the transfer of wealth to their creditors,the purpose of this phenomenon is called"asset substitution".With the increase of debt,corporate financing costs rise,financing capability will decline.Even if a higher-earning investment projects,also can refuse or give up because of financing difficulties,resulting in "under-investment".This paper aimed to theorizing about the agency problem between shareholders and creditors,take asset substitution effect and under-investment effect for statistical analysis and empirical test.Take 1993-2014 non-financial companies in Shanghai stock exchange and Shenzhen stock exchange as samples,first of all,we have a statistical analysis.The results showed that:(1)risky assets and long-term loans have a significant positive correlation,namely asset substitution effect exists.(2)in 17 industries,14 industries are significant with asset substitution effect,and asset substitution effect coefficient varied from all walks of life.Points in the year,from 1993 to 2014,a total of 22 years,asset substitution effect is found in 17 years,but the asset substitution effect coefficient of different years have little difference.(3)the under-investment effect is widespread,the under-investment effect of different years have little difference,the under-investment effect of different industries has much differences.Compared with the state-owned enterprises,the non-state-owned enterprises are more likely to have under-investment behavior.Based on the statistical analysis above,we have an empirical test on the effects of asset substitution and under-investment,the results showed that:(1)the asset substitution effect significantly positive related to the nature of a company,compared with non-state-owned enterprises,state-owned enterprises are more likely to have the asset substitution behavior.(2)the asset substitution efffect showed a inverted "U" shaped relationship with equity balance degree.(3)the asset substitution effect proved a "U" shaped relationship with financial leverage.(4)all samples regression analysis results showed that the under-investment effect proved a inverted "U" shaped relationship with the long-term loans.But the regression analysis about the state-owned and non-state-owned enterprises found that the finding applies only to the non-state enterprises,for the state-owned enterprises it is not applicable.(5)the under-investment effect and equity balance degree proved a significantly inverted "U" shaped relationship.(6)the under-investment effect showed a inverted "U" shaped relationship with the managers shareholding proportion.(7)the under-investment effect showed a inverted "U"shaped relationship with the financial leverage.(8)enterprise growth condition should have an significant influence with both asset substitution and under-investment effect.The better a company's growth condition,the less possibility asset substitution behavior occurs,the greater possibility under-investment behavior occurs.