Effect Of Executive Incentive On Over-investment

Investment decision-making is the core content of financial management, theimprovement of enterprise performance and the increase of the company value bothdepend on the investment activity. So investment efficiency is of great significance tothe development of the company. Because of the two rights separation in moderncompany governance, investment decision-making power is held in the hands ofsenior executives, so the ability and attitude of executives will directly affect theinvestment efficiency. According to the principal-agent theory, there is conflict ofinterest between shareholders and managers, which is that shareholders enjoy theresidual claims of the enterprise, but managers only hold power of resource control.benefits that executives get from investment may not be able to make up for the costswhen making investment decision, so executives may not be willing to spend toomuch energy on investment decisions. And in order to maximize power of resourcescontrol,executives may be more inclined to excessive investment to control moreresources, which will reduce the efficiency of investment and encroach onshareholders’ equity. Therefore, in order to alleviate the principal-agent problems,companys should make effective executive incentive mechanism to combine theinterests of executives and company, then executives will have enough energy toimprove the efficiency of investment.Compared with the state-ownedenterprises,private enterprises have very limited resources, the efficiency ofinvestment will influence enterprise’s destiny. In addition, executive incentivemechanism of private enterprise is flexible and can be linked to company performancefully. Based on the above analysis, this article will do research on Chinese privatelisted companies to explore how the executive incentive influences over-investment,and to study the current situation of executive incentive and investment efficiency ofprivate enterprises, which will provide some policy recommendations for the designof executive incentive mechanism and improving corporate investment efficiency. This study combines normative research and empirical research. First of all, onthe basis of existing research results, we put forward the research hypothesiscombining with the relevant theory of executive incentive and investment efficiency.Second, we choose shenzhen A-share market of Chinese private listed firms from year2007to2012as sample data,we reference the study of Richardson (2006) in thecapital investment model to estimate the excessive investment level of the samplecompanys. Finally, we take executive compensation incentive and equity incentive asexplanatory variables, and the excessive investment as explanatory variables, at thesame time we control some other possible influential variables in the multiple linearregression analysis, then we get the result that how the executive incentive affectsexcessive investment.The results show that executive compensation incentive has a significantnegative impact on the over-investment, indicating that the higher the executives’compensation, the more significant of the inhibition against excessive investment.Executive equity incentive has a negative effect on excessive investment, but theresult is not significant. This result may not conclude equity incetive has no effect oncurbing excessive investment, because the phenomenon of executives holding zerostake is very serious, it will significantly affect the regession results. Finally,according to the research conclusion, we put forward policy suggestions on perfectingexecutive incentive mechanism and improving the efficiency of investment, thenpoint out the limitations of this paper.