The Study Of Market Competition, Property Rights And The Over-investment Of The Company

Most literature focuses on the research of the impact of market competition on theenterprise performance when studying the relation between the market competition and anenterprise behavior. Our paper holds the point that the investment behavior of a companydirectly influences its performance, and therefore an investigation into the relationbetween an enterprise investment and the market competition it faces has much morepractical significance. This paper explains how the market competition and the differencesbetween market shares of different companies in the same industry affect the manager’sincentive by building a game model concerning the principal and the agent problem. And,in the game model,we set the way that managers’ effort influence the companies’ costs inorder to illustrate that the harder the managers work, the more efficient the investment is.Furthermore, we suppose that as long as the reduction in the enterprise market sharedoesn’t result from the consumer’s preference, manager of the company with small sharewill work harder. Then we use listed companies dating from2000to2011as our empiricaldata to investigate the impact that market competition and property rights have on thecompany’s over-investment behavior. Besides, this paper explores the realization path bywhich market competition influences the over-investment of a company. In addition,taking into account the regional marketization process and the level of competition in aindustry representing whether the regional and industrial economic resource and productprices are regulated by the market, we discuss the interaction between the two.Our empirical results show that market competition effectively restricts theover-investment of the enterprise and the impact that market competition has on theover-investment is achieved by changing the manager’s incentive. In other words,competition alleviates the agency problem of the manager so that the investmentefficiency of the company will improve. However, after considering the effect of ownership, we find that competition plays a better constraint on the over-investment of acompany only in the private enterprise rather than in the state-owned enterprise. Becausethe appointment and dismission of the manager are different between the private enterpriseand the state-owned enterprise, the supervision role competition plays on has no effect onthe state-owned enterprise. Besides the government eventually will pay the bill for thestate-owned enterprise, so the liquidation effect becomes invalid. In addition, we find thatafter breaking the high barrier to enter into a low-competition industry, the privateenterprise intends to overinvest when basing on the consideration of expanding the scaleof market share. Finally, we argue that in the region with higher marketization process,competition has effectively constrained the over-investment.