Corporate Investment Efficiency, Cross-subsidies And Outside Directors’ Governance

The investment expenditures of Chinese enterprises have maintaining high growth rate in recent years, losses on huge investments are still common, which offers wake-up call for the problems of investment and governance of Chinese enterprises. On the basis of principles of corporate finance, the investment expenditures primarily depend on opportunities, but it also relates to net operating cash flows because of the influence of financing constraints or agency costs. The sensitivities of investment to opportunity and investment to cash flow mean to what extent the investment depends on opportunity and cash flow, and denote the investment efficiency and the interference of frictions such as financing constraints with investment efficiency respectively. This dissertation, based on a firm-year observation sample of Chinese A-share listed companies over the period 2003-2010, empirically examines the problems of investment and governance of Chinese corporates especially the SOEs(State-Owned Enterprises) based on the sensitivities of investment to opportunity and cash flow, and then theoretically studies the investment decision and micro-governance mechanism of the board dominated by outsiders. The main contents and conclusions as follows:Firstly, an investment model is established based on financing constraints and agency costs, and the effects of state assets supervision reform and subprime crisis on corpoarte’s investment efficiency are analysed according to this model, then the dynamics of investment efficiency with the changes of external environment are empirically examined based on the investment-opportunity sensitivity. The results indicate that: The investment efficiency of Chinese firms especially the SOEs is significantly improved by the state assets supervision reform, but decreased during the subprime crisis. Financing constraints deepen the decline of investment efficiency, while the state holding can mitigate this decline. The investment efficiency of SOEs is gradually reduced from the central SOEs to the local SOEs, and the provincial SOEs’ investment efficiency is most influenced by the reform and crisis.Secondly, the cross-subsidies of business group investments and its influencing factors have been examined. Group’s cross-subsidies lead to division’s inefficient investment and harm investment efficiency. The results show that: The cross-subsidies not only relax the constraints of subsidized party namely members with high financing constraints, but also strengthen the constraints of subsidizing party namely members with low financing constraints. The financial development contributes to relieve the problem of inefficient cross-subsidies. The rise of division managers’ agency cost not only decreases the degree of group’s resource transfer to the subsidizing party, but inhibits the relaxing of financing constraints for the subsidized party, which shows that the cross-subsidies mainly happens among sectors with low agency costs of division managers. The agency cost of controlling shareholder, i.e. the separation of control and cash flow rights, aggravates the resource transfer to the subsidizing party, but promotes the relaxing of financing constraints for the subsidized party. As the rise of group government control level, the cross-subsidies are gradually mitigated.Thirdly, the paper further tests the governance effectiveness of outside directors because investment flaws expose governance problems. It shows that: The independent directors primarily play the supervisory governance role, and the appointed directors by big shareholders primarily embody the governance functions of advisory and resources provision. The outsiders of state holding enterprises(SHEs) mainly embody functions of supervisory and advisory, their counterparts in private holding enterprises mainly play the role of resources provision. The governance functions of the two types of outsiders in local SHEs are complementary. As for the central SHEs, the independent directors do not play supervisory role, and the appointed directors also have no advisory function, so their governance functions are dislocated.Lastly, the investment decision and micro-governance mechanism of the board dominated by outsiders is studied theoretically based on an investment model of strategic information transmission. Findings are that: The outsiders’ dominance in board seat can effectively oversee and restrict insiders in the decision-making process of investment. The insiders transmit information when the information reveals that the increased expected profits can compensate for their private interests loss. This information revealing contributes to outsiders’ supervisory function as well as the improvement of investment performance. The enhancement of outsiders’ advisory function and informed probability can stimulate insiders’ information revealing, while the agency costs of insiders and the monitoring costs of outsiders inhibit the insiders’ information revealing, thereby restricting the outsiders’ functioning.The above conclusions have important reference value for the deepening of Chinese reform of enterprises especially the SOEs.