An Empirical Study On The Impact Of Institutional Stock Ownership On Inefficient Investment

The investment and financing are the action of paramount impertinence within a corporation. Once actual investments diverge from ideal set of investment, inefficient investment occurs. The two symptoms of inefficient investment, over-investment and under-investment are positive or negative divergence respectively. There are consequence of inefficient investment like decline of enterprise value and loss of shareholders. The main causes for inefficient investment are principal-agent problem and information asymmetry. In general, Institutional investors are capable of reducing agency cost and alleviating information asymmetry, both adverse selection and moral hazard, either directly or indirectly. Hence it’s a reasonable expectation that institutional investors could exert influence on corporate inefficient investment.In terms of connecting mechanism between institutional investor and inefficient investment, financing behavior is a perfect choice. Firstly, financing itself could affect the execution of investment project; secondly institutional investors care about financing proposal, especially when equity financing involved. The intention of this thesis is to examine the impact on inefficient investments by institutional investors through financing behavior. To be specific, what’s the influence on under-investment or over-investment exerted by long term banking borrowing and external equity related financing respectively. And what’s the role of institutional investors on this influence, magnifying or weakening. A two layer regression model is to be build and estimated the coefficient of long term bank borrowing, external equity related financing, institutional investor and the simultaneous factor by multiplying institutional investor’s share with debt borrowing and equity financing.Through empirical studies, several conclusions are attained.a. Long term debt borrowing from banks has a positive relationship with over-investments, but negatively related with under-investments.b. External equity related financing makes a good impact on under-investment, but would exacerbate over-investmentc. Institutional investors would reinforce the proved positive relationship between over-investment and long term debt borrowing from banks; so doer to the negative relationship between under-investment and long term borrowingd. As for external equity related financing and over-investment, institutional investor play a affirmative role and reducing over-investment; while for under-investment and equity related financing, no obvious impacts by institutional investors is proved.The findings of this study make contribution both theoretically and practically.First, it reveals the relationship between outside financing and inefficient investments and shows necessity of more supervision. Second, it encourages institutional investors to exert more pressure on financing activities to restrain inefficient investment. Third, this study broadens research perspective both of inefficient investment and institutional investors.