Product Market Competition, Executive Incentive And Inefficient Investment

Investment, as one of three financial decisions is a core point related to the financial problems in an enterprise and also plays an important role in affecting the macro and micro economy and capital markets. From the macro level, the investment efficiency of an enterprise will affect a country’s economy; from the micro level, the efficiency of investment of an enterprise will affect the enterprise values and sustainability. Therefore, how to improve the investment efficiency of an enterprise has become a topic of public concern. However, managers and owners are prone to often inconsistency due to agency conflicts in that managers often incline to be thrown into over-investment to seek their own interests at the cost of the interests of the enterprise; information asymmetry in or outside of an enterprise will lead to "adverse selection" so that the enterprise fails to involve in effective investment in projects with funds in a timely manner, thereby resulting in a lack of investment due to the opportunity slipping away even the funds are gathered. At this time, the executive incentive is an effective tool to alleviate the agency conflicts and product market competition is able to weaken the information asymmetry. This combination in the non-efficiency investment can effectively inhibit inefficient investment behaviors which are prevalent in listed enterprises in China. Some studies have focused on the impact from unilateral factors on inefficient investment and rarely start from both of internal and external factors. Therefore, this paper aims to combine external environment product market competition affecting the non-efficiency investment and executive incentives affecting the internal mechanism to engage in a research on inefficient investment behaviors. Taking a variety of executive incentive mechanism which can be divided into explicit and implicit categories into account, the paper selects three mechanisms as research subjects for the sake of universality, innovation and comprehensiveness: executive compensation and option incentive(explicit incentive) and pay-the-job consumption(implicit incentive).Based on research results from related literature and the paper design, the paper needs to solve the following issues:(1) how do external environmental factor-he product market competition and internal system-executive incentive affect the efficiency of non-investment behaviors;(2) what are the different impacts from different executive incentive mechanisms on inefficient investment in product market competition;(3) what executive incentives does an enterprise take to achieve the best effect of investment in case of different non-efficiency investments(over-investment,under-investment).This paper takes all A-share listed companies as subjects to explore the influence from executive incentive in inefficient investment in product market competition and how do they affect on inefficient investment by virtue of the relationship between the two. Executive incentive is part of enterprise governance in that scientific executive incentive mechanism can reduce agency costs and improve investment efficiency. In product market competition, the external environment affecting inefficient investment affect, different product market competition will bring different effects on the executive incentive. Thus, the paper combines both of theory and empirical methods and prepares two paths: Product Market Competition- executive incentive-over-investment, product market competition- executive incentive- under-investment,the conclusions are in the following:1. Executive incentive is capable of inhibiting excessive investment and product market competition can promote the inhibiting effect of executive incentive in excessive investment; executive incentives can mitigate under-investment and product market competition can promote executives incentives to mitigate the under-investment. In the fierce competitive market, enterprises have to be threatened by being liquidated at any time and managers are always on the verge of increasing urgency and nervousness to avoid being liquidated, hence, they will take a positive attitude to deal with investment decisions, and improve investment efficiency so that they can keep a long-term foothold in the market. With the same remuneration,managers will adopt a more positive attitude to face the opportunities and challenges every day in the industry with intense product market competition, and the investmentefficiency is often higher than that in the industry with less fierce competition.Therefore, improving product market competition can promote the inhibitory effect(mitigation) of executive compensation on the excessive investment(under-investment).2. Pay-the-job consumption has a position to mitigate the under-investment and product market competition can promote the mitigation on under-investment;pay-the-job consumption cannot effectively curb excessive investment behaviors, and may even promote excessive investment. Product market competition is conductive to reducing information asymmetry and reasonable pay-the-job consumption can effectively motivate managers, mobilize their passion and improve their investment efficiency. But excessive consumption will result in luxuriousness and increase the enterprises agency costs, thus resulting in inefficient investment. When the pay-the-job incentive mechanism is more perfect, product market competition plays an important role in the inhibition of inefficient investment behaviors; on the contrary,when the pay-the-job incentive mechanism is inadequate, product market competition plays a limited role in the inhibition of inefficient investment.3. Option incentive can inhibit the inefficient investment despite not very obvious effects: First, there are fewer listed enterprises carrying out the option incentive and the data is not convincing; secondly, enterprises with option incentive have no perfect mechanisms and fail to bring the desired effect; thirdly, the legal system for option is not complete and the rights of people cannot be protected.Finally, some relevant policy recommendations, disadvantages and some suggestions for the future research are put forward after the conclusion.