Research On Inefficient Investment Of China's Listed Companies: Stock Mispricing Perspective

The investment of corporate decides the macroeconomic gross demand directly and affects the macro aggregated supply through the allocation of production factors indirectly. Although investment has a significant impact on a stable macroeconomic growth, there are conflicting views on issues such as determinants and the efficiency of investment. Uncertainty in this area makes corporate investment a topic of many economists'interest. Despite of numerous researches on corporate financing and dividend policy, academic research on investment is relatively sparse and most of the research focused on impact of information asymmetry and agency problems on investment decisions. Prior to the reform of shareholder right splitting, there was a lack of scientific valuation standards in the capital market of China due to shareholder right splitting and some other system defects. Moreover, the strong speculative atmosphere in the market made corporate investment very easily go strayed. Research on corporate investment from the perspective of stock mispricing is still rare. For this reason, this paper attempts to analyze the formation, characteristics and management of inefficient investments from the perspective of stock market mispricing. By studying details about inefficient investments, we demonstrate current conditions and problems of corporate investment decisions to provide valuable ideas for corporate and the government on increasing investment efficiency. This paper consists of seven parts as follows:The Introduction section studies the literature on corporate inefficient investment, analyzes the investment behaviors of domestic firms, and presents the direction, content and significance of this research. The second part discusses research on domestic and foreign investment and inefficient investment. These include a brief review of traditional investment theories, asymmetric information, agency problems and mispricing on investment decisions. It is pointed out that a major challenge in measurement of inefficient investments is to find the source of controversies. The third part analyzes the characteristics of corporate investment in the context of the special features of the Chinese system and provides background support for the follow-up study. The fourth part focuses on the efficiency of investment in the context of stock mispricing. By using the traditional investment theory, we designed the expectation model based on intrinsic value for firm level investment decisions to estimate the company expected investment. Then based on the same model, we design Index of investment efficiency to show the relationship between the expected level of new investment and inefficient investment. Thereafter, we analyze the characteristics of the firm's inefficient investment and investment efficiency for the causes of low efficiency. The fifth part is an empirical analysis on the determinants of investment and inefficient investment decisions. We utilize group, sub-regression method to study the financing constraint hypothesis, free cash flow hypothesis and the hypothesis of stock mispricing on inefficient investments before and after the share reform. In addition, we identified some changes in factors that impact the inefficient investment before and after the reform;after the share reform. free cash flow over-investment has improved, but over-investment problem caused by financial factors is more serious. The sixth part is an empirical analysis on how stock mispricing affects the efficiency of investment. This chapter examined the timing of investment theory, catering theory and the information transmission theory. We found that stock mispricing mainly caused over-investment through channels that catered to investors and through market timing. However, after the share reform, this impact is largely through information channel. The seventh part presents conclusions and policy recommendations and directions for further research.Innovation of this paper is in the following areas:First, from the perspective of the company stock mispricing, we did systematic study on inefficient investment. Stock mispricing is an inevitable background factor in decision-making of corporate investment, but this factor has been largely ignored. This paper explicitly combined this factor into the research system of corporate finance, agency problem and investment efficiency.Second, based on the concept of investment efficiency, investment model was designed to measure under-investment and over-investment, which provided solid support for using agency theory, financing constraints and stock pricing theory to explain corporate inefficient investments, while in the past most of such data came indirectly from analyzing investment behavior.Thirdly, Ohlson's residual income valuation model is introduced in the measurement of expected investment. When estimating the expected investment, in order to solve the problems on distinguishing normal growth and mispricing, we selected the residual income valuation model (Ohlson 95) which is relatively advanced and easy to operate when there is a need to estimate the intrinsic value of the firm. Thus, to explore role and status of the capital market in the company's investment decisions, evidence from the empirical analysis is direct and easy to understand.Fourth, the detailed analysis was done to evaluate the firm's investment efficiency. Based on the expected investment model, the paper designed the company's investment efficiency index and comparatively analyzed the investment efficiency under different investment features, which filled the gap in this research area. In the literature of investment efficiency, more research is from the macroeconomic point of view, little is done on investment efficiency of firm level.Fifth, a systematic and comprehensive theoretical and empirical analysis was performed on channels through which stock mispricing has impact on over-investment. This work improved current domestic research status on this topic, especially in the area of information transfer channels of stock pricing.Sixth, this paper comparatively analyzed corporate investment efficiency and inefficient investment before and after the share reform, which provided significant reference for evaluating primary effects of the share reform on managing investment and financing during the post-reform era. After the share reform, research and literature on corporate finance and dividend behavior change is gradually increasing, but evaluation of the impact of the share reform on corporate investment behavior was rarely performed from the perspective of empirical analysis.