The Effect Of Institutional Investors On The Overinvestment Of The Companies

Investment is essential for economic development, but in China over-investment iswidespread today, it’s a waste of resource as well as damaging the value of the company.How to suppress over-investment effectively is hotspot. In kinds of restrict machining ofover investment, institutional investors turn to be positive shareholder and couldsuppress over investment has been paid close attention. But majority of exist researchare on the relevance between the percent of institutional investors’ shareholder and overinvestment, this article based on the features and institutional investors as newshareholder, select board governance as a angle research the effect of institutionalinvestors on over-investment.First of all, the article analyzes the differences between institutional investors andother shareholders as well as the action of institutional investors in corporategovernance. Then, via Board as realization form of participating in corporategovernance, analysis institutional investors improving the investment decisions of theBoard directors that suppress over investment. On the basis of theoretical analysis,select data of Shanghai and Shenzhen A-share listed companies, measure the level ofover-investment, and add Board governance as a regulate variables, via empiricalanalyzes the effect of institutional investors on over-investment.Theoretical research results show that:(1) institutional investors to participate inthe Board of directors to change one-man situation of a major shareholder, to someextent, formatting the checks and balances on the major shareholders, raise the thresholdfor large shareholders to make the over-investment decisions that damage the value ofcompany and increase the private benefits, and institutional investors to participate inthe Board helps to strengthen the independence of the independent directors, torepresent the interests of all shareholders better;(2) institutional investors to participatein the Board can apply their own expertise and information superiority into the company,reducing over-investment caused by managers overconfidence and non-professionaldirectors under asymmetric information; institutional investors to participate in theBoard to make up the absence of the owner of the state-owned shareholders, to improvethe level of the constraints of the Board on managers, to curb excessive investment.Empirical results also show that:(1) over-investment phenomenon exist in many listedcompanies;(2) the impact of institutional investors to curb excessive investment byincreasing the proportion of independent directors, and to promote the two grade separation to improve board governance is more significantly, by the committee of theboard of directors to reduce the excessive investment does not pass the test ofsignificance. In summary, the institutional investors to be able to participate in boardgovernance on the curb excessive investment role.Through theoretical and empirical analysis shows that institutional investors toparticipate in the Board can reduce over-investment, China must develop theinstitutional investors vigorously, make it play a role in the greater extent, based on itgive some recommendations of the development of institutional investors: to competewith the major shareholders require the gradual relaxation of the restriction of the accessmechanism and the shareholding ratio, increase the proportion of institutional investors’holding; promote diversified development of institutional investors, form thecompetitive landscape; under the situation that a single shareholder cannot meat theholding requirement, to encourage institutional investors to take joint action toparticipate in corporate governance; in addition, to strengthen the supervision ofinstitutional investors, to create a favorable external environment for the participation ofinstitutional investors in corporate governance, to improve equity structure, improve thequality of listed companies.The innovation of this paper is that: extend the role of institutional investors incorporate governance to the area of financial management, institutional investors asshareholders have the intention to participate in corporate governance and cast highlevel of corporate performance, corporate governance efficiency will be reflected in thecompany specific financial behavior, and thus paper analyzes the inhibition of excessiveinvestment that institutional investors through the Board of Directors; research oninstitutional investors and board of directors, over-investment in this article is not onlyabout the relationship but also further elaborated that institutional investors participationcan improve the ownership structure, and different from the characteristics of the othershareholders and own the professional advantages, can effectively improve theinvestment decisions of the Board, to curb excessive investment.