Research On The Relationship Of Institutional Investors, Free Cash Flow And Company-Paid Consumption

After the separation of management and ownership, company-paid consumption exists in the company management. Recently, the position-related consumption of our listed companies becomes more serious, extravagance appears more and more often. The government' “six bans” and “eight provisions”, which aims to eliminate social extravagant atmosphere, generates some deterrence, but they never solve the problem that position-related consumption. In contrast, these measures result in some abnormal behaviors, “famous wine in plastic mineral water bottles”, “underground clubs”, and so on. These invisible consumption of managers harm the interests of corporations and stakeholders. Considering this analysis, corporations are supposed to strengthen the company government to control the position-related consumption. China Securities Regulatory Commission puts forward the strategy, developing the institutional investors in 2000. This policy provides solid foundation to the future of institutional investors. Since then, the size of institutional investors has grown fast and gone to the diversification, including securities investment fund, social security fund, brokerage of financial products, securities company, QFII, insurance company, enterprise annuity, trustee company, finance company, and other institutional investors. Tradable share reform began from 2005, this event gives a good chance to the development of institutional investors.As the institutional investors hold more and more shares, stockholders become different, which attracks scholars' attention. Based on the recent background, this paper mainly studies the suppression of institutional investors to company-paid consumption, trying to find the way to restrain the company-paid consumption. Free cash flow is considered as one of the essential conditions. The innovation of this paper is analysing the relationship of institutional investors, free cash flow and company-paid consumption in a research framework, perspective new. First of all, this paper regards institutional investors as two types, non mutual fund and the mutual fund, and discuss the effect to company-paid consumption individually. Secondly, this paper researches the effect of the two types of institutional investors to free cash flow, separately, and relationship between free cash flow and company-paid consumption. At last, this paper analyses the relationship of institutional investors, free cash flow and company-paid consumption in a research framework. This paper gets some conclusions: compared to non mutual fund, the mutual fund's holdings has the effect on restraining company-paid consumption; the correlation between the mutual fund's holdings and free cash flow is negative;the correlation between free cash flow and company-paid consumption is positive; on the one hand,the mutual fund's holdings restrains the company-paid consumption directly, and on the other hand, the mutual fund's holdings can alleviate the amount of free cash flow so that the company-paid consumption will be reduced. As regards these conclusions, this paper put forward many suggestions and measures to help improve corporate governance mechanism: striving to develop institutional investors and lessening institutional constraints; fostering diversified institutional constraints and strengthening the regulation; establish joint action mechanism of institutional investors; improve the disclosure system of company-paid consumption.