Debt Financing, Investment Behavior And Enterprise Value

Different corporate financing decisions lead to different investment decisions.Enterprise value is an important basis for weighing the reasonableness andeffectiveness of the investment and financing decisions. The foreign theory isgenerally believed that the increase of debt financing results in the tax deductibilityeffect, and reduces the behavior of over-investment. Liabilities will increase thevalue of the business. On the other hand, liabilities are likely to increase the risk ofenterprise bankruptcy and the conflict between the shareholders/managers andcreditors, resulting in the assets substitute or underinvestment behavior, which willreduce the value of the business. In trade-off theory, liabilities demonstrate aninverted U-shaped curve with business’s value. China is in the transformation periodof market economy. The theory of investment and financing, the relationshipbetween liabilities and corporate value, based on foreign mature capital market,apply for the capital market of China? At the same time, China’s listed companieshave influenced by the financial crisis in2008and the tight fiscal policy began in2010, how is the complex relationship among debt financing, investment behaviorand corporate value?The paper takes listed companies2009-2011financial data as research object.Examine the relation between debt and enterprise value, inspect the liabilities’relationship with investment behavior, use investment behavior as an intermediatevariable to reexamine the relation between debt and enterprise value. The empiricalresults show that: First, there is a shortage of investment in all walks of life. Second,debt financing have an significantly negative effect on enterprise value, theliabilities increase without the increase of enterprise value. Third, Liabilities notonly can inhibit the over-investment, but also lead to the under-investment.Short-term liabilities play a role in inhibiting the over-investment, but notalleviating the under-investment. Long-term liabilities increase seriousover-investment. Fourth, the level of corporate liabilities is beyond reasonable limit,investment behavior is not an effective intermediate variable. It results that the tightfiscal policy increase the risk of corporate finance and financing costs, and producea more adverse effect on the firm.