Research On Managerial Power And Over-investment Behavior Of Firm

The rapid growth of China’s economic has provided huge development opportunity to many companies. Investment expansion is the only way for enterprises to grasp the market opportunities. But because of the complexity of decision process, the results of the investment decisions are not always maximize the enterprise value. Over-investment problem arises because of the principal-agent problem, which gives huge damage to the wealth of shareholders, also, the enterprise value. According to the managerial power approach, managers have the motivation to do opportunistic rent-seeking activities using their powers. Investment activities are the main way for enterprise expansion, and can bring higher wages, more controllable resources, higher reputation and more stable position to managers. Also, investment activities need managers’ discretion, which creates opportunities to rent-seeking.In requirement of research, this paper selects Chinese A-share listed companies from2007to2012as the study examples, and analyzes the relationship between managerial power and over-investment. Empirical results show that there is a significant effect from the managerial power to over-investment behavior. The expansion of managerial power aggravates the phenomenon of over-investment of the enterprise, which leads to the decrease of investment efficiency and the damage of the enterprise value. Higher efficiency of corporate governance and competition of external product market can exert effective restriction effect on managerial power. This article explores the underlying reason of the over-investment problem from the enterprise internal factors, and provides theoretical basis for improving the efficiency of enterprise investments based on the internal corporate governance mechanisms and external market governance mechanisms.