A Study On The Contingent Governance Effect Of Bank Debt On Overinvestment

Investment is the most important financial decisions for all enterprises; it has adirect impact on the production operation and continuing development of theenterprises. In recent years, China’s economic growth is mainly driven by theinvestment. Because of blind expansion, some industries and enterprises arise theproduction surplus, even loss and bankruptcy. With the deepening of Chinese bankingreform and strengthing of CBRC’s supervision, the commerical and independence ofbanks have ehanced effectively. At the same time, the financial development isdifferent in our country. All the background gives the new chance to study bank loan’scontingent governance effect on overinvestment in new period.This paper takes the2009to2011listed companies of manufacturing as sample,using Richardson investment model to measure the overinvestment. We study bankloan’s refraining effect on overinvestment and consider the difference of institutionalenvironment in diverse regions. We carry on the correlation test and get the followingconclusions. Firstly, there is a positive correlation between free cash flow andoverinvestment. Secondly, bank debt can constrain the oveinvestment. Finally, bankdebt have a more powerful control effect on overinvestment in those region with highlevel of financial development.In the process of research, we combine the debt constraint mechanism frommicrocosmic aspect with financial development from macrocosmic level to study thisissue. We also provide the related emprical evidence to improve the externalinstitutional environment. Then put forward some suggestions as follows. First of all,strengthing the tie function of the board and improving the internal governance toenhance the supervision and constraint effect. Furthermore, establishing a perfectmanager market and forming the martket competition to decrease the abuse of freecash flow. What’s more, deepening banking industry reform and even drivingfinancial system reform. Only in this way, can we allocate the credit funds inoptimization pattern and strenghen the control effect on listed companies.