The Effect Of Managerial Ownership On Overinvestment:Theoretical And Empirical Research

In modern enterprises with the separation of ownership and management,managers may overinvest to maximize their own interests at the cost of damaging the interests of shareholders and the enterprise value.Shareholders may implement equity incentives in order to restrict the inefficient investment.This thesis will discuss the effect of managerial ownership to overinvestment through theoretical and empirical research.Firstly,by reviewing related literatures,this thesis summarizes the relationships between overinvestment and several relevant factors,focusing on the different opinions about the effect on overinvestment put by managerial ownership.Secondly,this thesis does theoretical studies on the correlation between managerial ownership and overinvestment applying the idea and method of the game theory to explore the game equilibrium between shareholders and managers,and finds the nonlinear correlation between them.Next,this thesis does empirical research to verify the results of game analysis by constructing a multivariate regression model with samples of listed corporates selected from stock exchanges in Shenzhen and Shanghai.The result of regression demonstrates the nonlinear relationship between managerial ownership and overinvestment which is consistent with the game.Results are as follows: The relation between overinvestment and managerial ownership is inverse U shape.When the share proportion for managers is relatively low,it may stimulate managers to overinvest with the increase of shareholding ratio.Then the overinvestment in corporations start to decline after the ratio reaching a certain threshold.The results prove that managerial ownership has a nonlinear effect on overinvestment behaviors in the firms.However,only when the share proportion exceeds the critical point can managerial ownership constrain the overinvestment.The conclusion of theoretical research is proved by empirical research results.Finally,based on the conclusion and the existence of overinvestment with low managerial shareholding ratio in listed enterprises,this dissertation put forward reasonable suggestions to govern the overinvestment behaviors.