Investment Opportunity Set, Agency Conflicts And The Audit Governance Effect Of Overinvestment

Investment opportunity set is the expenses or option which related to the future investment decisions and can increase the value of corporate. According to the asymmetric information theory, high investment opportunity set will lead to low observability of management behavior. With this, in the process of choosing investment policy, the managers will prone to overinvestment programs, in order to expand the scale of company, improve the level of their remuneration and reputation and power. In recent years, with the continuous improvement of Chinese securities market, financial products emerge in endlessly. The way companies raise funds on the capital market innovation, investment opportunities available for companies is increasing. The problems caused by this high investment opportunity set have emerged. Once the company’s investment opportunity set goes too high, it will inevitably lead to a chain reaction, the overinvestment behavior may also be generated attention. Then it is necessary to make an in-depth study about the correlation between investment opportunity set and over-investment and countermeasures to the problems.As a monitoring mechanism, independent external audit not only can reduce agency costs and mitigate asymmetric information and other issues, but also can play a supervisory and regulatory role to financial management behavior of enterprise manage authorities. Financial statements is an important medium of external independent audit function, the auditor improve the accounting information quality and realize the supervision value by express an opinion on financial statements. Domestic and foreign scholars have also conducted a lot of theoretical analysis and empirical test about the relationship between investment opportunity set and financial governance mechanism and its influencing factors. By combing the literature, we can find that the vast majority of the literature studies and tests just to verify the economic consequences of investment opportunity set and how accounting information quality and high-quality audit would impact on the company’s overinvestment behavior. Few literatures analyzed whether high-quality audit could act on the company’s investment policy options by improving the quality of accounting information from the perspective of the investment opportunity set. For the overinvestment problem caused by high investment opportunity set, academic results have not yet been clearly about how the independent external audit plays the role currently. Based on overinvestment perspective, this article will analyze the agency conflicts caused by investment opportunity set and the governance effect of external independent audit. This is also the research purpose and meaning of the article.The essay theoretically analyzes the relationship between investment opportunity set and overinvestment behavior, the following conclusions:(1) The larger the companies’investment opportunity set, more serious the information asymmetry and agency conflicts. In order to reduce their employment risk and improve their compensation levels, managers tend to overinvestment program. That is, the larger the investment opportunity set in company the excessive investment will happen.(2) Due to the high-quality accounting information can improve the efficiency of the company’s investment and promote the efficient allocation of resources through improved information transparency and oversight mechanisms, as one of the important characteristics of accounting information quality, accounting robustness require companies may not confirm the expected assets and the possibility of income, and should confirm the estimated debts in time and overestimate the liabilities. It is an effective mechanism on reduces agency conflict between shareholders and managers, and it can also improve the company’s resource allocation efficiency and ultimately curb excessive investment behavior of the company.(3) Independent audit verify the fairness of the financial statements of listed companies by implementing the necessary audit procedures and collect sufficient appropriate audit evidence. It, to a certain extent, improves the quality of accounting information. Audit requirements theory thinks that it is precisely because the audits have an effect on accounting information quality and play a role of signal transmission that there is a demand for audit. This essay will join the factor of investment opportunity set to consider, and we find that hiring high-quality audits can reduce information risk and thereby inhibiting its overinvestment behavior by improving the authenticity and reliability of accounting information to the companies have high investment opportunity set.Based on the above theoretical analysis, this paper adopted the method of empirical research to validate theoretical results. We select the2003-2011A-share listed companies with overinvestment problem as samples, based on over-investment perspective, empirical analyzing the action mechanism that accounting information quality and high-quality to the overinvestment problem caused by high investment opportunity set. The results show that:(1) investment opportunity set and excessive investment positively correlated, the company with high investment opportunity set tends to over-investment.(2)After the introduction of high-quality accounting information, positive correlation between the investment opportunity set and over-investment will weaken.(3)For the companies hired high-quality auditors, its accounting information quality’s inhibitory effect on the overinvestment caused by high investment opportunity set is more significant.Basic structure of this paper is as follows:the first part is introduction. In this section, we introduce the concept of the investment opportunity set, and the issue of whether the investment opportunity set will result in over-investment. Also we broadly describe the article’s research background, purpose and meaning, writing ideas and research methods. The second part is the literature review. In this section, we mainly gather the research about the relationship between the investment opportunity set and overinvestment, and how the accounting information quality and high quality audit govern the overinvestment behavior. Finally we summarize these literatures. In the third part, we analysis the relevance between listed company’s investment opportunity set and excessive investment behavior, based on the principal-agent theory, information theory, the audit demand motivation theory to analyze the influence of the investment opportunity set on excessive investment behavior, and develop the hypotheses of this article. In the next part, we empirically study the correlation between listed company’s investment opportunity set and excessive investment behavior, testing the proposed hypotheses through the establishment of regression model. The fifth part is conclusion, summary of the empirical test results and limitations, points out the direction of further research and puts forward relevant policy suggestions.