Analysis Of The Relationship Between Executive Incentive And Over-investment

With the continued high growth of domestic investment in fixed assets, theoverinvestment problem has gradually become the hot issue of the management andacademia. China’s market economy is still at an immature stage. Due to the dominanceof state-owned shares, debt constraints, imperfect corporate governance mechanisms, aswell as regulatory delays and other reasons, the agency problems and informationasymmetry of listed companies is more prominent, arising from over-investmentphenomenon is very common. Excessive investment has become the main factorsrestricting Chinese listed companies to improve the quality and long-term sustainabledevelopment. Therefore, how to restrict the excessive investment behavior of listedcompanies to achieve the maximization of corporate value is a problem to be addressed.Firstly, by organizing research of executive incentive and excessive investment athome and abroad, it includes the following three aspects: causes of the over-investment,over-investment constraints, and executives’ incentives. Secondly, the papersystematically expounded the theory of executive incentive and excessive investment.And on the basis of previous studies, on the one hand, developing effective payincentives could suppress excessive investment behavior of executives. In addition,based on the interests of the convergence effect explains the inhibition of the executives’equity incentives for excessive investment. Based on the effect of a convergence ofinterests, the article explains the executives’ equity incentives inhibition ofover-investment. Then, the paper analyzes the relationship between executive incentiveand overinvestment again in depth. And this paper argues that a good salary contractshould help ease the problem of management’s self-interest caused by the action of theagent. Therefore, the establishment of the effective executive incentive contract as thecorporate governance process to solve the over-investment in such principal-agentproblem important institutional arrangements can effectively supervise and motivatemanagers to achieve consistency between the managers’ personal interests andenterprise value maximization, thus inhibiting the management of over-investmentimpulses. On this basis, the paper proposes the corresponding assumptions. This paperbased on the system background and theoretical analysis of executive incentive andoverinvestment, learning the practice of Richardson (2006), selecting relative data from2006to2011to estimate the level of over-investment, using descriptive statistic andmultiple regression model to test the correlation between executive incentive and overinvestment. Furthermore, taking into account the institutional background in Chinaand the market environment, the company’s compensation contract of the differentnature of property rights may be differ, the paper analyzed the impact of the nature ofthe controlling shareholder relationship between executives incentives and excessiveinvestment.The empirical results show that the level of executive compensation and proportionof executive stock ownership significantly negatively correlated with theover-investment. That the level of executive pay, the higher the proportion of executivestock ownership, more able to suppress the excessive investment; Compared to thenon-state-owned listed companies, executive pay and executives of state-owned listedcompanies stake excessive investment in state-owned listed companies no significantcorrelation; assumptions have been verified. A certain extent also to test theeffectiveness of the system of compensation contracts, and to provide a reference tofurther improve corporate governance, and improve incentives to ease the problem ofthe listed companies in China agent.