Research On Over-investment Behavior Of Chinese Listed Companies

In recent years, Chinese economy keeps a fleet rate of increase. And investment plays an important role in the development of Chinese economy. But because of the restrict of resource and consume demands, "hot invest" phenomenon appears in many industry and regions accompany with the excess increase of the investment, which causes series of problems, such as tight lack of energy and original materials, the excess of productive ability, the distort of economic construction, the repetition of development etc. Because of excessive investment, a flood of capital precipitates at some realms with excess production ability and poor profit ability. Excessive investment also reduces the ability of absorbing labor force in economy increase, making difficulty in the coordination development of economy, environment and society.Business enterprises are the main participants in economy circulation. "Hot invest" of the macroscopic level and "over-investment" of the microscopic level is inseparable. Over-investment is the investment with negative net present value, which injures the value of whole business enterprise beyond the company growth opportunity or development direction. The Chinese market economy is still at its first stage; furthermore, the ownership structure of most corporate is not reasonable at all. The over-investment trend of Chinese listed company is very obvious and serious under above condition. Over-investment question has become a main hindrance to the quantity promotion and long-term development of Chinese listed company. Moreover, the investment funds of many business are mainly supported by bank, so the low investment efficiency of enterprise means the risk accumulation of financial system.Because of the separation of ownership and control, the asymmetry of information, and the existence of supervision cost, free cash flow is under the control of manager in modern company. Manager has the capability of investing corporate resource to non-profit projects; moreover, manager's payment usually has a kind of positive correlation with corporate scale. So manager has both ability and motive to throw corporate free cash on non-profit projects that could bring himself private benefit, which leads to corporate over-investment. On the other hand, the big shareholder controls the decision power of the company, providing the possibility of violating small shareholder. The big shareholder inclines to obtain private income which small shareholder can not share. In practice, one of the methods that the big shareholder violates small shareholder is to abuse the investment funds and self transaction. Conflicts among manager, big shareholder, small shareholder and creditor all affect investment behaviors, which could lead to over-investment of enterprises.Because of the vacancy of the owner, agency problem and conflicts of benefits in Chinese state-owned enterprise become more seriously. When there are plenty of cash flow in enterprise, the manager of state-owned enterprise usually chooses to enlarge investment to extend the scale of enterprise. Through investment, the manager could control more resource and power. If investment gains success and enterprise becomes stronger, the manager could acquire the governmental reward with higher salary. Even if investment encounters failure, the manager need not undertake the loss because corporate governance of state-owned enterprise is poor. So the manager of stated-owned enterprise usually would rather invest items which net present value is under zero than give dividend to the owner. Chinese listed companies which are mostly changed from original state-owned enterprise have not got rid of "investment hunger syndrome"after gaining part of funds from capital market. Chinese listed companies with poor governance are still along the investment behavior pattern of the original state-owned enterprise. In the poor governance condition, the over-investment of listed companies with plenty of cash flow become more and more serious, which leads to low efficiency of internal fund allocation and the "hot invest" in the macroscopic level.The relation between corporate governance and enterprise investment behavior is very closely. Valid corporate governance can realize the balance among shareholders, creditors and managers etc. through series of system arrangement, dissolve the interest conflicts among stakeholders of business enterprises, and guarantee the scientific investment decision and the operation of enterprise. Exactly on this meaning, Milgorm and Roberts points out, when the firm is being viewed as a series of uncompleted contracts, the validly combination of the power to obtain surplus and the power to control is the key for increasing investment efficiency and operating efficiency. And the substance of corporate governance is series of system arrangement concerning the allocation of the power to obtain surplus and the power to control. Therefore, corporate governance plays an important role in the investment decision process. The level of corporate governance is related to the investment efficiency of the business enterprise directly.As the main cause of future cash flow increase and enterprise growth, investment behavior not only affects the financial and dividend policy directly, but also relates to the business performance strongly. Business investment behavior should be paid with more academic concerns, but because of its complexity, the research on investment behavior has been in stagnation over a long period of time. Furthermore, the research on Chinese business investment behavior is still in its start stage, which could not explain practical investment behavior.The paper synthesizes western scholar's latest investment theories, adopts kinds of research method, analyzes the investment behavior of information asymmetry condition under the actual circumstance of the Chinese capital market, examines the sensitivity of and free cash flow, researches the true influence of ownership structure, corporate governance, debt and dividend policy to over-investment behavior of Chinese listed company, explains the formation mechanism of over-investment of Chinese listed company. The empirical research provides theory foundation for the governance of over-investment and the establishment of scientific investment decision mechanism of Chinese listed company.The paper launches the discussion mainly around five questions.(1) The theoretical analysis and empirical evidence on the over-investment behavior of listed company. Based on business investment theories and Chinese economy actual condition , the paper analyzes the existence possibility of over-investment of listed company. The paper also establishes a calculating model based on the latest theory to measure over-investment degree of Chinese listed company. The empirical research proves that, over-investment of listed companies exists indeed, and has become more and more serious.(2) The "catalyst" function and sensitivity analysis of free cash flow on over-investment of listed company. Enterprises obtain investment funds from internal or external financial resources. The internal finance does not need pay interest or dividends, so business investment depends on free cash flow strongly. But if there are no valid corporate governance mechanisms, free cash flow would bring the enterprise very serious agency cost, turning the over-investment motive of the business executive to action. The paper examined the sensitivity between the over-investment degree and free cash flow of Chinese listed company.(3) The true influence of ownership structure and corporate governance mechanisms on over-investment of listed company. The ownership structure establishes the composition of shareholders , confirming the structure of decision-making, executive and supervising organization and the relation between these organizations and manager, creating deep influence on the investment decision of enterprise. The function that ownership structure affects corporate value is realized by affecting the cost and efficiency of corporate governance. The appropriate arrangement of ownership structure can promote the efficiency level of corporate governance, moderating benefits of each stakeholder, realizing scientific decision to maximize business value. The paper examines the valid corporate governance mechanisms and the invalid corporate governance mechanisms of restraining over-investment of listed company in China through empirical study.(4) The empirical examination of the stipulation effect of debt and dividend policies on over-investment of listed company. There are two sides of the debt influence on business investment. On the one side, the shareholder-creditor conflicts could bring asset substitution and under-investment question; On the other hand, the company has to pay for the debt and interest which can decrease the business funds and over-investment behavior. The dividend policy could also affect the internal funds and free cash flow in business enterprise, reducing the chance of being engaged in negative net present value and over-investment. The paper examines the effect of debt and dividend policy of restraining over-investment of listed company in China under the soft stipulation in budget through empirical study.(5) The prevention and governance of over-investment behavior of Chinese listed company. Based on the above empirical study, the paper puts forward some suggestions of the prevention and governance of low efficient investment particularly over-investment of Chinese listed company, such as the reform of finance and investment system, the establishment and promotion of inner control system and corporate governance.The innovation of the paper mainly includes three points.First, the paper establishes the analysis frame of over-investment behavior of Chinese listed company, and explains the formation mechanism based on the calculating model of over-investment. The paper concerns the phenomenon of low efficiency investment for point of departure. The paper confirms the existence of over-investment of Chinese listed company from theoretical and empirical evidence, examining the sensitivity between free cash flow and over-investment degree. The theoretical and empirical researches above are both helpful to discover true causes of the descending investment efficiency.Second, the paper discusses corporate governance questions from the rights balance of stakeholders to scientific decision-making degree , studying over-investment behavior in the eye of corporate governance, which makes the realm and theories of corporate governance studies deep and perfect. The paper leads corporate governance into the traditional investment- cash flow analysis model, investigating connections among investment behavior, free cash flow and corporate governance. The paper establishes a theoretical business investment behavior model driven by information asymmetry and agent question, which is examined by empirical study of finance data of Chinese listed company. These researches provide some new valuable methods for business enterprise to reduce the agency cost of free cash flow. Third,the paper analyzes the effect of ownership structure, corporate governance mechanisms, liabilities and dividend policies on the over-investment degree of listed company through empirical studies. Based on the above empirical study, the paper puts forward some valuable suggestions of the prevention and governance of over-investment of Chinese listed company.