A Study On The Impact Of Financial Flexibility On Inefficient Investment

Investment is the important financial decision of the enterprise, the efficiency of investment will not only affect the quality of the subsequent cash flow, but also affect the value of the enterprise. Macro level, since the reform and opening, the economy of our country has sustained rapid growth, and investment plays an important role in stimulating economic growth. However from the access to the 1996-2014 investment data showed although the annual total investment is growing rapidly, with an average annual growth rate reached 18.657% but the fixed assets investment effect coefficient is decreasing trend, indicating that China’s investment efficiency is on the decline. As the microcosmic unit of the market economy activity, the enterprise constitutes the important content of the whole society fixed assets investment. However, compared to western developed countries based on clear property right, perfecting corporate governance structure, strict supervision, reliable credit and law of mature market economy environment, the corporate governance mechanism and capital market environment of our country are not perfect, which cause inefficiency investment of enterprise is increasingly serious. Aiming at the increasingly serious problem of inefficiency investment, Chinese scholars try to find out effective inefficiency investment management mechanism from different angles, and some achievements have been made. External level, Chinese scholars try to research from the perspective of product market competition and macroeconomic policy; internal level, Chinese scholars try to research from corporate governance, internal control and diversification. The research mainly focuses on the internal and external environment of the company, but the research on the inefficiency investment governance mechanism from the perspective of corporate financial management is relatively small.Financial flexibility is an important financial strategy, which are closely related to the inefficiency investment of enterprises. The purpose of keeping financial flexibility is to deal with the external shocks and better grasp investment opportunities, while the investment opportunities are reflected in the improvement of the investment efficiency. Therefore, whether financial flexibility can restrain the inefficiency investment and improve the investment efficiency is an important topic with both theoretical value and practical value. This dissertation research on the governance role of financial flexibility on inefficiency investment from the aspects of over-investment and under-investment, with principal agent theory and asymmetric information theory as the foundation, we incorporating the corporate governance and financing constraints into the research framework of financial flexibility and inefficiency investment. This dissertation is beginning with two mainlines which are accordance with the corporate governance, financial flexibility and over-investment and financing constraints, financial flexibility and under-investment.The research emphasis of this dissertation is whether financial flexibility can restrain the inefficient investment, so how to measure the inefficiency investment and financial flexibility is the basic problem of empirical research. Aiming at the measure of the inefficiency investment, after summarizing and researching the measurement method based on existing research, the final choice is using Richardson (2006) model to metrics the investment efficiency of listed companies, and using the Biddle (2009) model for robustness test. Most of the existing research using Tobin Q as a proxy of investment opportunity. However, due to the development of China’s capital market and product market are not mature enough, resulting in use Tobin Q as a proxy of investment opportunities are not applicable. Therefore, the use of fundamental Q as a proxy of investment opportunity, because in the process of structural fundamental Q without information reflecting the market value of the company, also does not have to be limited to the use of the assumption of the Tobin Q, so it can be more effective as a proxy of investment opportunities. The difficulty is how to determine the composition of financial flexibility and the selection of benchmark values for financial flexibility measurement. In this dissertation, the financial flexibility is subdivided into cash flexibility and liability flexibility, and the benchmark value is determined by using target fitting method. Since financial flexibility is embodied in the idea of excess reserves, accurate benchmark values can make the measurement of financial flexibility more effective.This dissertation not only enriches the economic consequences of financial flexibility, but also broadens the research perspective of the inefficiency investment governance mechanism, and the full text is composed of 7 chapters.Chapter 1:Introduction. Mainly including the research background and the significance, the related concept definition, the research mentality, the research method, the research contribution and the innovation and so on.Chapter 2:literature review. According to the research contents, this part is mainly divided into three topics. The first topic is about the review of financial flexibility, which mainly includes financial flexibility factors, reserve and economic consequences research; the second topic is about the research on the review of inefficiency investment, which includes inefficiency investment formation mechanism and inefficiency investment governance mechanism research; the third topic is about the review of the relations between financial flexibility and inefficiency investment, which mainly includes research on relationship of cash, debt, financial flexibility and inefficiency investment. Through literature review, on the one hand, we can clearly understand the current research status and direction of development in the field. On the basis of the previous research, we can clearly understand the content of this study and possible innovations. On the other hand, through literature review, we can clearly understand the empirical research method, the variables related to measurement of content, which can lay a solid foundation for the empirical study.Chapter 3:The theoretical basis of the inefficiency investment. Through making full use of the research results of information economics, contract economics and financial management, the entrust agency theory and asymmetric information theory are reviewed and analyzed, which can lay a theoretical foundation by researching the relationship between financial flexibility and inefficiency investment.Chapter 4:The study on the inefficiency investment of the Chinese listed company. First, through the comparison and analysis of the inefficiency investment measure method, we choose the measurement method which can attain the target of this dissertation. The model is improved from the investment opportunity proxy variables, and Tobin Q is replaced by fundamental Q, so we can measure the inefficiency investment more efficiency. Then, using multiple regression analysis method to measure the inefficiency investment level of Chinese listed companies. Carry on the analysis to the inefficiency investment from four aspects which are overall situation, dynamic change, industry distribution and regional distribution. Lay the foundation for the realistic background for the following empirical research.Chapter 5:The study on the impact of financial flexibility on over-investment. This chapter studies the impact of financial flexibility on over-investment. Through the comparison and analysis of financial flexibility measurement, the financial flexibility measurement is finally determined. The study research on the relationship between financial flexibility and over-investment, and construct corporate governance index in accordance with the elements of corporate governance. According to the index, research on the corporate governance effect in the relationship between financial flexibility and over-investment.Chapter 6:The study on the impact of financial flexibility on under-investment. This chapter studies the impact of financial flexibility on under-investment. First, the study research on the relationship between financial flexibility and under-investment. Then, research on the financial constraints effect in the relationship between financial flexibility and under-investment.Chapter 7:Conclusion and Outlook. This section concludes the whole dissertation, the limitations of the dissertation and the future direction for further research.There are three main contribution and innovation of this dissertation:(1) Broaden the research perspective of inefficiency investment governance mechanism.Researches on inefficiency investment management mechanism is studied from the aspects of internal and external environment of enterprises, mainly concentrated in the product market competition, macroeconomic policy, corporate governance, internal control and diversification evaluation angle, but the research from the view of the company’s financial management inefficiency investment governance mechanism is lack. This dissertation not only study the relationship between financial flexibility and inefficiency investment through the analysis of impact mechanism of financial flexibility on inefficiency investment, and combined with the special institutional background in China, but also study how corporate governance and financial constraints effect in the relationship between financial flexibility and under-investment.(2) Improve the measurement method of inefficiency investment.Because of the measurement error problem that using Tobin Q to measure investment opportunity. In this dissertation, we use fundamental Q instead of Tobin Q and applied to Richardson (2006) model and Biddle (2009) model, the improvement of the model can be more accurate to measure the inefficiency investment.(3) Improve the measurement method of financial flexibility.How to measure financial flexibility is an important problem, this dissertation improved Aimin Z (2011) model, using the target value method instead of the industry average method which is used to determine the benchmark. More accurate benchmark can led more effectively reflection on the financial flexibility excess reserves, also in the empirical analysis with reference floating 10% for the robustness test.