A Study On The Ultimate Controlling Shareholders, Institutional Environment And Over-investment

Industrialization in China is not complete, so in the foreseeable future, itmay continue to maintain a high rate of investment. But behind the rapideconomic growth, there is the phenomenon of duplication and over-investment.In the listed companies of China, high investment and low efficiency is moreprevalent. On one hand over-investment reduces the value of the companies,affecting the growth of companies; On the other hand, inefficient investingbehaviors will be harmful to the stable economic growth.With the establishment of modern enterprise system, China has achievedthe separation of government and enterprise, scientific management gradually,but there are serious agency problems in the listed company in our country.The efficiency of investment in China is not the same problem as the Westerncountries due to the massive state-owned companies, which have thephenomenon of absence of owners, property rights undefined. When it comesto inspecting the efficiency of investment in China, we should analyze theultimate controlling shareholders and special institutional environment. Theinstitutional environment will often affect agent’s rational behavior, besidescompany’s investment decision will connect with the agent’s behavior. Thushas the inefficiency investment behaviors. So the study on the effect of theultimate controlling shareholders and institutional environment onover-investment broadens the existing research perspective.In this paper, we investigate the relationship among ultimate controllingshareholders, institutional environment and over-investment. Using the data ofChin’s listed companies from2007to2010. We use Richardson(2006) modelto calculate the degree of inefficiency investment. According to the nature ofultimate controlling shareholders,we have the samples divided into threecategories, while introducing the institutional environment index.We find that,government control especially the local government control has inducedover-investment, but the improvement of institutional environment can easethe over-investment behavior. The effect of government intervention in thegovernment-controlled listed companies is higher than the private controlled listed companies; The effect of financial environment in thegovernment-controlled listed companies is lower than the private controlledlisted companies; The effect of legal environment in thegovernment-controlled listed companies dose not have significant differenceswith the private controlled listed companies.