Investment Decisions, Corporate Governance And Firm Value

According to traditional investment theory, corporate investment decision depends on its growth opportunities and the level of free cash flow. Because free cash flow is a prerequisite, Companies facing financial constraints can't completed investment even with good growth opportunities, However if having enough free cash flow, one with bad growth opportunities may invest as well. Thus, it's difficult to distinguish which factor dominates the corporate investment decision.Tobin(1969) proposed that investment depends only on the company's growth while FHP (1988) found evidence of a significant correlation between investment and free cash flow. Since then, the research literature related to investment focused more attention on the existence of the sensitivity of investment to free cash flow and how to explain this issue. There is general academic agreement that the existence of the sensitivity and acceptance of the two main explanations based on the "agency theory" and "financing constraints". The former believe that because of interests conflicts of managers and shareholders, managers may waste free cash flow to invest in negative NPV projects, leading to the sensitivity of investment to free cash flow. The latter from the asymmetric information point of view said that the serious financial constraints the company faces may make it give up some positive NPV projects leading to the sensitivity of investment to free cash flow. Research in recent years turned to investment efficiency and effects of corporate governance on investment efficiency.This essay took listed companies of manufacture industry in China A stock market as research sample and analyzed the differences of the main factors of investment between different classes of companies. The empirical results imply the following conclusions: companies with more abundant free cash flow, its investment decision is more often dominated by cash flow while those with not sufficient free cash flow are more concerned with growth but subject to the amount of free cash flow; on the other hand, companies with not so good corporate governance often face more issues of information asymmetry, and serious financing constraints, so subject to cash flow, their investment only reflects part of the investment opportunities while for those with good corporate governance, their investments better reflect the investment opportunities and are more consistent with the company's growth opportunities. The article from the agency point of view to explain the empirical results of classified samples according to free cash flow while for the empirical results of classified samples according to the idiosyncratic fluctuations of stock prices, this article explained it from the perspective of information asymmetry. The interpretation from these two perspectives reflect two issues the practices and the academic community are very concerned about:on the one hand, governance deficiencies induce the companies with sufficient free cash flow to over-invest inefficiently on the other hand the inherent deficiencies of capital market led to some companies unable to obtain sufficient funds to meet their investment needs. Finally, we tested the relationship among investment, corporate governance and the entrepreneur value and empirical results show that a positive correlation between the improvement of corporate governance and entrepreneur value. The robustness of regression results support above conclusions when excluding the market factors.