The Impact Of Debt Financing On Non-efficiency Investment Behavior

In recent years, investment has become the driving force of economic growth in China, the rapid growth of investment also contributed to the rapid growth of the GDP, but the increase in the scale of investment does not mean that investments are effective. Actually the investment in various industries is very unbalanced, some overcapacity, some excessive investment and some insufficient investment, these phenomenon have reduced the potential of the sustainable development of the real economy. Therefore, the article studies this phenomenon to identify the reasons behind and propose ways to solve the non-efficiency investments. The investment is an important way to achieve business value. It is the main initiative for the growing of company. Effective investment will realize the cash flow growth and increase the value of the company in the future. Investment plan is as a reference to the financing plan, also it is as the starting point to the financing options and goal setting. Investment will arrange the use of funds according to the financing plan, and the situation of the investment will affect the financing options and dividends of the enterprise. Seen in this light, investment and financing behaviors are not only independent but also relevant, the enterprise can develop under the condition of the both behaviors running coordinately. If studying the two behaviors separately, corporate investment and financing decisions will lose relevance. Debt financing is one of the main modes of financing of enterprises. Scholars engaged in extensive and in-depth studies of the impact of debt financing to the investment behavior. The theoretical and empirical research results of each scholar are different due to the different research background, sample and research methods. Modigliani, Miller (1958) has created a precedent for the investment and financing relationships, under the condition of no taxes, no transaction costs, the same personal and corporate borrowing rates, the capital market in full force and effect, the scholar reached a conclusion that in the background of different capital structure,the total value of the company is always the same. Modigliani, Miller (1963) amended MM Ⅰ, come to the theory of capital structure MM Ⅱ under the conditions of the tax. It assumes there existing a corporate income tax, they found that the liabilities have the effect of tax avoidance. The effect could reduce the weighted average cost of capital,and then improve the value of the corporate. The value of the enterprise will reach to the maximum when enterprises only rely on debt financing. However, the real world, almost can not achieve these stringent assumptions, it is not perfect. Therefore, there are defects in the real use of the MM Ⅰ and MM Ⅱ, the points of these two theories on the arrangement of the financing structure are too extreme. Since the1970s, along with the use of principal-agent theory, signal theory, asymmetric information theory, corporate finance factors hypothesis, control over the theory of modem corporate finance theory, various scholars reached the new conclusions through the studying on the relationship between debt financing and investment. Within the liabilities of agency costs starting up in the agency relationship between shareholders and creditors, Jensen&Meckling (1976), Myers (1977) come to the conclusion that the conflict between the shareholders’ creditors may lead to the over-investment or insufficient investment. With the equity agency costs starting up in the shareholders manager human principal-agent relationship, Grossman&Hart (1982) come to the conclusion that the liabilities are able to ease the conflict of the shareholders’ manager and play the camera on the governance role. The modern theory of corporate governance believes that the role of debt financing on the investment behavior is not only a way of realizing investment gains, but also is an important aspect of corporate governance and external governance.This paper studies the effect of the debt financing on the company’s investment behavior in three aspects:the debt ratio, debt maturity structure and debt financing sources; then researches on the relationship between liabilities and non-efficiency investment behavior by grouping.First of all, by reading the research literatures of home and abroad in this respect to summarize the results of previous studies and identify the direction of this research.Second, based on the various theories of previous studies, the paper combines the economic and institutional environment that Chinese enterprises are faced with and the status of the debt financing market to analyze the relationship between debt financing and investment of listed companies in China, then proposing the assumption for empirical research.Finally, we take the selection of the balanced panel data of A-share listed manufacturing companies of shanghai and Shenzhen from December31,2006to December31,2010as sample to empirical research. We give a judgment of applicability of the mixed regression model, the fixed effects model, and the random effects model through the F test and Hausman inspection. Ultimately I chose to use individual fixed effects regression model to the data.At first, taking the use of the whole sample, we give the empirical test of the impact on the listed companies in China investment behavior from the aspect of the overall level of debt, debt maturity structure,the source of debt financing. Then according to the identification method of inefficiency investment, the sample will be divided into the excessive investment group and the under investment group. We eliminate the normal investment group, and mainly investigate the influence of debt financing to two kinds of concrete inefficiency investment behavior. In this paper the identification method of inefficiency investment takes examples from the predecessor’s research, such as the method of Haiyang Xie and Liming Dong. Taking the consideration of the factors of early scale of enterprise investment, we use the new investment in fixed assets in the current period/the final value of previous fixed assets as the explained variables.In order to eliminate the differences of previous investment scale factors, I compare the average investment of enterprise investment period, rate of return on investment with the industry average investment, the industry average rate of return on investment. Finally we compare the growth rate of enterprise investment during the period of investment with the growth rate of return on investment.Then I distinguish the enterprises between the excessive investment and lack of investment,and research them group by group. The result shows that in different groups, the relationship between the debt financing level, the term structure of debt, debt source and company investment spending is different.(1) From the sample as a whole, level of debt financing is negatively related to the investment expenditure of the company obviously. With regard to the whole sample, regression results indicate that the debt financing may induce the camera management effect of overinvestment or may induce the inefficient investment of underinvestment. According to the empirical results of the relationship of the debt term structure and investment, it shows negative correlation of short-term liabilities and investment expenditure. Because of the short deadline of short-term investment, companies always face with repaying the capital with interest, by which the FCF would be restrained. In addition, when the business can not guarantee on-time repayment, it would fall in to financial difficulties, for which it may face bankruptcy. From the view of the bankruptcy cost theory, the threaten of bankruptcy faced by handlers would encourage them to arrange investment reasonably, which may restrict the action of inefficient investment. The empirical results indicate that it shows negative correlation between long-term liability rate and investment expenditure. Seeing from theoretical analysis, long-term liability may induce the action of asset substitution which may aggravate liability costs. This mainly because compared with the short-term liability, the long-term liability brings long repayment period. Thus when managers of shareholders find the moral hazard behavior of the debtor, the new contract can not be sign to restrain them. So it shows positive correlation with investments from the general idea. However, the empirical results of this article proved the negative correlation between them. This text may based on this point that when the long-term creditors anticipate they can not restrains the managers of shareholders by changing contract, they became more cautious to design the initial contracts with more severe conditions. For keeping from the managers of shareholders standing in their own light, they supervise the business more strictly. So it shows negative correlation between long-term liability and investment. From the source of liabilities, it also shows negative correlation between bank loan and investment expenditure, yet commercial credit has no effect on investment. This empirical results accord with the normative analysis, which based on the improvement of govern circumstance of our bank creditors.(2)From the aspect of over-investment grouping, the correlation between liabilities and over-investment is negative, that means liabilities restrain over-investment. The correlation between short-term debt and investment is negative, that means short-term debt take a camera governing effect on restraining over investment. The positive correlation between long-term debt and over investment is not so obvious. It implies that in listed enterprises in China long-term investment doesn’t bring serious over investment. Bank loan can play a positive role in retraining investment, that means the restriction effect, which bank loans take on loanee, has been enforced.(3)From the aspect of insufficient investment grouping, the correlation between debt and investment is positive. Base on the theory analysis in the third chapter, according to principal-agent cost theory, the conflict between shareholder and debtor can cause insufficient investment. However, the result of insufficient investment cases reveals that in a certain range increasing debt ratio can enhance investment expenditure.it shows that the conflict between the creditors of liabilities and shareholders of listed companies in China mainly is over-investment and do not cause the apparent lack of investment. Insufficient investment behaviors of listed companies may depend on their short-and long-term investment opportunities, free cash flow and available investment capital. Liabilities are also a way of financing and can provide fund for long-term investment. Introduction of the liabilities to a certain extent can be able to alleviate the underinvestment due to lack of funds. Short-term liabilities and investment expenditures are positively related. The result can not concluded that the short-term liabilities had played the role of Governance in the inhibition of underinvestment, it might be the corporate misappropriate a short-term funds for long-term investment. From the above empirical results, we can find, the impact of liabilities on the investment is really complex, and sometimes can even be contradict. Therefore, to investigate the role of short-term liabilities played in inhibiting investment require carrying out other studies, which is the limitation of this article. In the insufficient investment group, long-term liabilities and investment spending was negatively correlated, which indicates that if long-term liabilities increase, the investment spending of business will decline further. Similar results in the overall sample indicate that the excessive control on long-term debt ratio inhibits normal business investment, leading to insufficient investment.This study further improves the study of the influence of the debt financing of domestic listed companies on the investment. With regard to debt maturity structure and balance sources, according to China’s economic and institutional environment in recent years and the progress of the relevant laws, combined with the specification analysis and empirical results, we compare the current and previous studies. Based on the double-sided role of debt financing, we provide a theoretical and empirical reference for selecting a appropriate financial leverage, reasonable debt maturity structure, optimal debt sources, effective investment for a company. This paper strengthens the influence of corporate governance on corporate investment, especially the promoting role of liabilities governance. At the same time, the paper put forward necessity requirements for accelerating the improvement of the bond market, and improve laws to protect the interests of creditors.