The Impact Of Free Cash Flow On The Overinvestment

As the separation of ownership and controller in modern corporation.the problem of agent is serious.There are more and more concerns on free cash flow and overinvestment caused by agent.In this paper.we research the relation between free cash flow and overinvestment.And we find that the overinvestment is significantly positive to the free cash flow.The free cash flow is an important factor to overinvestment.but not the only one.If there is more free cash flow in the corporation.the overinvestment is more serious.The robust tests have been done in this paper. and the results are the same.As the ownership is a basic part of corporate governance structure.we research free cash flow and overinvestment in different ownership structure. The ownership structure contains:the controller.ownership concentration, institutional investors, executive ownership.The positive relation between free cash flow and overinvestment is more serious in non-state-owned enterprises than in state-owned enterprises.The overinvestment is more sensitive to free cash flow in the non-state-owned enterprises.ownership concentration can curb the overinvestment of free cash flow more effectively in the non-state-owned samples. When the ownership is concentrated.the interest of large shareholders is consistent with the company.The large shareholders would supervise the managers.which can curb the overinvestment of free cash flow. ownership concentration can not curb the overinvestment of free cash flow effectively in the state-owned samples.Maybe as the absence of property rights.the supervising to the management is weaker. The institutional investors and the managers do not work effectively, whether in state-owned enterprises or in non-state-owned enterprises.