Impact Of Overcapacity Through Security Market Drive Investment

In recent years, overcapacity phenomenon appeared frequently in our country. It affected the healthy and sustained development of China’s economic. Thus, research on overcapacity became the central issue in academia. This article raise the security-market-drive-investment-model which is based on the security-market-drive-acquisition theoretical framework. Through the elaboration of the bounded rationality behavior of government and security-market-drive-investment under institutional transition, this article carries on the Panel Data Analysis of35listed PV companies from2008to2012, and the analysis of PV IPO companies. Our research is based on the stock market, Stock price volatility of the non-fundamentals is obtained through decomposition of listed companies’ Book-to-Market ratio. This is also explanatory variable directly explaining to security market drive investment model in China. By investigating the interaction between bounded rationality of government behavior and security-market-drive-investment, Panel Data Analysis of35listed PV companies from2008to2012, and the analysis of PV IPO companies, our research raise the conclusions as below:(1)Security market may drive the inappropriate investment of listed companies. Through decomposition of Book-to-Market(BM) ratio, the measure of volatility in the non-fundamental factors (CSI) is obtained. The effects to listed companies in the photovoltaic industry are proved. The study of this article shows the effect to listed companies in the photovoltaic industry is more obvious in the non-fundamental factors than fundamental factors. This can illustrate when investors are positive in photovoltaic industry, the managers of listed companies are very pleased to make use of these irrational behaviors to finance. They can set up subsidiary corporation or expand their business to guide the investors to make the cost lower. This is shown that listed companies have a bright future and photovoltaic stock becomes a hot concept stock. The stock price rises. And listed companies can raise funds to expand the business. This will also have an effect on the investors so that the stock price will rise again. It forms a spiral mechanism.(2) The bounded rational behaviors of government could affect companies’investment through security market. With the perspective of PV industry, especially from2009to2011, there are many state supporting policies. Driven by financial incentives and promotion incentives, local government made a stronger effort to support photovoltaic industry regardless of the capacity expansion elsewhere. These two kinds of policies encouraged the investors so that large quantity of capital inflow results in higher photovoltaic shares of listed companies. This leads to relaxing in financing constraints and listed companies can raise funds with low cost. Then listed company would choose some positive NPV project to invest.(3) The security-market-drive-investment mechanism can also be applied to company’s IPO issuance. The data on Chapter4shows that many PV companies that went public after2008were concentrated in2010, which was the golden time for PV industry. These PV firms chose to go public during this period with considerations of factors including share price and industrial growth. Although the size of the new IPOs were not as big as the secondary equity offerings of companies that had already gone public, these newly public companies represent one of the driving forces in the PV industry, portraying the fast expansion of this industry. This explains how new firms raise money from the perspective of equity financing:whichever the equity financing method is used, it has an impact on the production capacity of PV industry. Particularly in2010, investment in PV industry was widely viewed as a positive NPV project, which coincided with the further increase in production capacity of the newly public PV companies.(4) Security-market-drive-investment will aggravate the production over-capacity probably. Based on the discussions on the SEO financing of publicly traded firms and IPO financing of new firms, this paper illustrates that security-market-drive-investment influenced by the bounded rational behaviors of the government, would further aggravate the existing overcapacity in PV industry.In sum, security market probably has an impact on corporate investments. When the market sentiment and macroeconomic policies are both in favor of PV industry, there is a possibility of over-investment in public companies. Many mid/small-sized firms will follow such trend because of herd effect, contributing to the over-investment in the whole industry, aggravating the overcapacity. This is not only a phenomenon in PV industry but this industry is very representative of the whole market. It is a feasible and novel method to study the impact of equity market on overcapacity through the security market drive investment model.