Is Debt Financing "Inhibitor" Or "Booster" To Over-Investment Behavior Of Real Estate Companies?

According to corporate finance theory,debt financing has a leverage governance mechanism to over-investment behavior.The leverage governance mechanism of debt financing has been supported by many empirical researches.However,in China's real estate companies,leverage governance mechanism seems have lost its power.On the one hand,real estate companies generally have high asset-liability ratio.On the other,real estate development companies expand investment scale immoderately to compete in industrial or regional rankings.The contradiction between high debt leverage and over-investment behavior suggests that the leverage governance mechanisms of debt may have become ineffective in China's real estate industry.However,there have been few studies pay attention to this contradiction.Few scholars have conducted in-depth discussions on the heterogenous effect of leverage governance mechanism between real estate industry and the other industries.Nested in real estate industry's context,this paper sheds light on the relationship between debt financing and real estate companies' over-investment behavior.Considering the heterogeneity of debt financing contracts,this paper also tests the governant effect of different debt contracts.Besides,sentiment of real estate market is included as a possible reason for the failure of debt financing governance.At last,the relationship between debt financing governance and monetary policy is tested.This study can provide inspiration for judging the relationship between debt financing and over-investment in China's real estate companies,identifying specific part that fail to conduct leverage governance mechenism,finding the reason for debt governance failures in the real estate industry,and finding ways to optimize debt financing governance mechanisms.Using a sample of China's A-share listed real estate companies from 2005 to 2016,empirical studies show that:(1)The leverage governance mechanism of debt financing for over-investment has failed in real estate companies.There even exist a positive correlation between debt ratio and over-investment scale of real estate companies.Debt financing has become a"booster" for real estate companies to implement excessive investment.While similar researches of other industries show that debt financing has a significant governance effect on over-investment,which indicates that the failure of debt governance in real estate companies is a special case of the real estate industry.Therefore,the single-industry research of real estate companies is necessary and meaningful.Further testing of property rights shows that the degree of failure of debt financing leverage governance in state-owned real estate companies is more serious than that of non-state-owned real estate companies.(2)Different types of debt financing have different agency costs and governance effects.In order to identify the specific failure parts of debt leverage governance,this paper considers the heterogeneity of debt contract.The empirical results show that bank loans and trade credits have both failed to effectively control over-investment behavior of real estate companies and even become the source of funds for real estate companies to implement over-investment.Short-term liabilities are not able to conduct better governant effect than long-term liabilities as traditional corporate finance theories suggested.Long-term liabilities have great agency cost and become the "booster" to over-investment of real estate companies.The heterogeneity of debt distribution structure will also affect the governance effect of debt.Empirical results show that the more liabilities the subsidiary undertakes,the more unfavorable the debt governance.(3)The fictitious economic characteristics of the real estate industry means that the effect of debt governance will be affected by sentiment.Therefore,this paper introduces the concept of investor sentiment from stock market into real estate market and uses principal component analysis method to construct a sentiment index of real estate market.Based on the real estate market sentiment index,the relationship between market sentiment,debt financing and over-investment of real estate companies are examined.The empirical results show that optimistic market sentiment can not only directly promote housing enterprises to increase excessive investment spending,but also can aggravate over-investment behavior of real estate companies by increasing their debt financing scale.That is,the irrational housing market sentiment is the underlying reason for debt governance failure.(4)Debt governance mechanism has been proved ineffective or even become the"booster" for the over-investment behavior of real estate companies.Can macro monetary policy be an effective remedy?Inspired by the governance bundle theory,this paper examines direct governance effects of monetary policy to over-investment behavior of real estate companies and the synergies between the two corporate governance mechanisms.The empirical results show that price tools of monetary policy can directly prevent over-investment in real estate companies,but its effect has a time lag.The increase of interest rate can significantly enhance the leverage governance of debt to real estate companies' over-investment behavior.The quantitative tool of monetary policy has a direct governance effect on over-investment of real estate companies.In non-state-owned real estate companies,quantitative tools of monetary policy can also form a collaborative governance bundle with debt financing and reduce the degree of failure of debt governance.Relative to non-state-owned real estate companies,state-owned real estate companies are less sensitive to the regulation of monetary policy.The academic innovation and research value of this research are as follows:(1)Firstly,the single-industry research of this paper effectively isolates the industry noise.The empirical results proved that industry heterogeneity is also an important factor affecting the effectiveness of debt governance.The real estate industry different from the other industries in their investment objectives,investment targets,the degree of utilization of debt financing,and the strong relationship between real estate industry and institutional factors such as land finance,economic growth,etc.These institutional factors lead to great differences of the relationship between investment behavior of real estate companies and debt governance.(2)Secondly,debt contract heterogeneity is considered as a moderator of the relationship between debt and over-investment.Heterogeneity of debt source,term structure,and the distribution structure are tested,which helps to identify the specific part of debt governance failure.The empirical results show that the governance effect of debt contract heterogeneity in China's real estate industry is different from that of western corporate finance theory.In addition,the introduction of the debt distribution perspective fills in the gaps of related researches.Existing studies often assume that debt distribution structure within enterprise group has no effect on the effectiveness of debt governance.The empirical results of this paper show that debt distribution structure will significantl y affect the effectiveness of debt governanc.(3)At the same time,capitalized pricing is the biggest difference between real estate market and other product markets.Taking this difference into account,this paper derives the concept of investor sentiment from stock market into the real estate market,and construct a sentiment index of real estate market.Then this paper examines the relationship between sentiment of real estate market,debt leverage and over-investment behavior.The introduction of sentiment into real estate market allows this study to test the influence of subjective psychological beliefs on the behavior of real estate companies and creditors.The results show that optimistic sentiment is the reason for failure of debt governance mechanism in the real estate industry.(4)In addition,this article jumped out of the endogenous perspective and explored the synergistic effect of monetary policy and micro-debt leverage governance.Incorporating macro and micro perspectives into a unified analysis framework helps to restore the micro corporate governance into its embedded institutional environment,also explores whether monetary policy can supplement the failure of debt financing governance.(5)This study explained the micro mechanism for the accumulation of bubbles in the real estate market.The over-investment of real estate companies is the micro-foundation for real estate market bubble,and the failure of debt leverage governance is one of the micro reasons why the real estate bubble cannot be contained.This study helps to understand the contradiction between high debt ratios and over-investment behavior of real estate companies.Also,this paper provides empirical evidence for financial over-support to the accumulation of real estate market bubbles.