Free Cash Flow, Debt Constraint And Over-Investment

As the necessary prerequisite for company to exist and develop, Investment is able to promote the growth of the company, as well as bring the continued growth of revenue in the future. Therefore, the efficiency of investment as an important criterion to judge the success of their investments is directly related to the companies’ value maximization. According to the domestic and international research on Over-investment behavior currently, it is generally proved the high dependence between over-investment and free cash flow.Meanwhile, debt as an effective tool for one of the corporate governance mechanism can effectively reduce this dependence between investment and cash flow, and further constraint the over-investment behavior. However, combined with the specific institutional background in china, the constraint of debt is different for the companies of different background.Therefore, the paper mainly studies the following aspects:Firstly, based on free cash flow hypothesis, to verify the agency problem of free cash flow upon A-share listed companies. Secondly, based on the theory of debt governance, from the two dimensions of the debt and debt maturity structure, to probe their different limit effect on over-investment respectively. Thirdly, to explore that for the A-share listed companies under different control, the limit effect of debt and its term structure are different. In order to solve the above three problems, We Select the2008-2011annual Financial data of the A-share listed companies as sample, and build the model that can reflect the relationship about Free Cash Flow^Debt Constraint and Over-investment. After the empirical analysis, the conclusions are as follows:(1)The A-share listed companies in china generally exit the agency problem of free cash flow, and that means there is a significant positive correlation between free cash flow and over-investment.(2)According to the total level of debt, it can restrict the companies’over-investment effectively. According to maturity structure of debt, Compared to the long-term debt, the short-term debt can restrict to over-investment significantly. Instead of limit affection to the companies’ over-investment action, long-term debt will promote the over-investment to some extent.(3)After the sample is divided according to the different type of company’s control, Compared to central and local government enterprises, the constraint affection of debt, especially short-term debt, is more pronounced in the private enterprises. The long-term debt will promote the Scale of over-investment in central and local government enterprises conversely.The contributions of this study are mainly manifested in the following three aspects:(1) Free cash flow is divided into positive and negative situations when we research the relationship between the companies’ free cash flow and over-investment as well as debt constraint.(2)From the two dimensions of the debt and debt maturity structure, to probe their different limit effect on over-investment respectively. Broaden the perspective of the study on debt constraint.(3)After the sample is divided into the central enterprises, the local governments’, enterprises and the private enterprises according to the different type of company’s control, we further study the constraint effect of debt and its maturity structure. It deepens the research upon the debt constraint.In this paper, there are still some deficiencies, mainly reflected in the following three aspects:(1) The model used to measure the scale of the expected investment exists some shortage. The main reason is there are some factors which can not be measured precisely.(2) we mainly study the relationship about Free Cash Flow、Debt Constraint and Over-investment. In fact, In addition to the free cash flow and debt constraint, there are many other factors we have not taken into account, such as the dividend policy of company.(3) The study on debt constraint is based on the background of double soft constraints of companies and banks. However, it presents new challenges to our research with the rapid development of financial industry in our country recently.