The Impacts Of Double Principal-Agent Problems On Chinese Listed Companies' Investment Behavior

Investment is one of the major forces driving China's economic growth. However, inefficient investment behaviors, overinvestment and underinvestment, made by enterprises will lead to harmful economic fluctuation. The macro-concerns of investment efficiency and institutional reform cannot provide the ultimate solution to this issue, and therefore new insight is given on the micro-perspective of enterprises' decision rules and interest entities.Based on the prior studies, we divide companies into twogroups——state-owned and non state-owned, incorporate principal-agent problemsinto our framework to analyze its effect on underinvestment, and examine the governance effect on restricting underinvestment by using the data of listed companies in 2001 to 2006.The studies suggest that, in the state-owned companies, there is a faint inverted U-shaped relation between ownership concentration and underinvestment; both two types of principal-agent problems can induce underinvestment since the insufficient managerial incentives, risk aversion and laze preference of the managers and controlling shareholder's embezzlement have a significant effect on companies' underinvestment. For non state-owned companies, the relationship between ownership concentration and underinvestment is reflected as a U curve. There is no evidence that the managerial incentives and manager's preference can affect companies' underinvestment, but there is a significant positive relationship between controlling shareholder's embezzlement and underinvestment, so we reach the conclusion that the second type of principal-agent problems is the main reason for non state-owned companies' underinvestment. As for the inhibitory effect of corporate governance on companies' underinvestment, the stock incentive compensation is effective; the independent directors' function is limited; and the restriction of other shareholders in the company to the controlling shareholders doesn't work, in fact, they even exacerbate the underinvestment of the company.