Empirical Study Of Executive Incentive Effect On Over-investment

In the modern corporate business model, executives as the company’s core decision-makers, their personal ability and attitude will directly affect the company’s investment efficiency, besides, the investment efficiency will affect the company’s prospects. According to the principal-agent theory, the company’s shareholders enjoy the residual claim, but the executives as client only have the control over resources and the right to operate. So the executives may not spent too much time and energy in making investment decision, which can not be correctly estimate the efficiency of the investment; in addition, executives have the urge to establish "Empire Group," in order to control more resources, access to more private interests, they will expand the scale of the company’s investment, which will inevitably lead to over-investment. Over-investment is not only a waste of resources, but also increase the company’s operating risk, and ultimately damaged the company’s performance. Executive incentives proved to be an important mechanism to alleviate agency conflicts, through the reasonable and effective incentives, make the interests of executives with the interests of shareholders in line, when making investment decision, the executive will attach more importance to the efficiency, which can reduce the company’s over-investment.Based on the background, the paper combined normative research and empirical research methods to investigate the executive incentives effect on the over-investment of listed companies. Based on the principal-agent theory, asymmetric information theory, incentive theory and the efficiency of investment theory, this paper proposes three theoretical analysis hypotheses:(1) the executive compensation incentives is negatively related to the over-investment;(2) the executive equity incentives is negatively related to the over-investment;(3) the level of post consumption is positively related to the over-investment. Select the A-share listed companies’ sample data from the Stock Exchange of Shanghai and Shenzhen, the sample-year is from 2012 to 2014.Drawing the investment model of Richardson, use the residual value of the regression to measure the sample’s investment efficiency, if the residual is greater than 0, indicates that the presence of over-investment, finally, we obtained 2468 over-investment samples. Then, establish the regression model, choose the executive compensation incentives, executive equity incentives, post consumption as explanatory variables, the over-investment as dependent variable, at the same time, we choose ten control variables, such as the company size, asset-liability ratio, growth opportunities, stock returns, etc. At last, use regression analysis method to examine the relationship between executive incentive and over-investment.The empirical results shows that: the executive compensation incentives is significantly negatively related to the over-investment, means higher the executive pay, the inhibitory effect of over-investment is more obvious; the executive equity incentives is negatively related to the over-investment, means higher the executive shareholding, the inhibitory effect of over-investment is more obvious; the level of post consumption is positively correlated with over-investment, means higher the level of post consumption, the more easily lead to over-investment. In this paper, three hypotheses were verified. The results provide a reference for the country’s regulatory and listed companies in terms of further improve the corporate governance structure, design more scientific and reasonable incentive mechanism. At the end, we give some policy recommendations, perfect the compensation incentives system, increase the equity incentives, strengthen the supervision of post consumption.