Study On Corporate Catering Investment Behavior

Traditional corporate finance theories are based on the presumption of complete marketcompetition, outside investors and financing deciders being rational. The theories on accountof the fact that market price can truly reflect corporate fundamental value clarifies managers'financing decisions and how they in turn affect corporate value. Distinct from the efficientmarket hypothesis, however, recent behavior corporate finance theories and results ofempirical study indicate that in real life deviation of corporate market price from corporatefundamental value is normal. Baker (2009) points out that under the inefficient markethypothesis, the separation of corporate financial decision and market pricing theory isinappropriate; financial economists commence to analyze and account for what investmentand financing decisions managers would make under such inefficient market pricing as wellas the efficiency of them. Hence the theories and the empirical study establish the irrationalinvestors' approach in corporate finance theories.Empirical studies within the frame of such approach demonstrate that market mispricingcould influence managers' investment decisions. Polk and Sapienza (2009) proposed cateringtheory of corporate investment decisions, which is regarded as the most efficient explanationfor the relation between such market behavior and corporate decisions. They point out that ifmanagers reject the investment on the project that investors think profitable, investors(shareholders) might be compelled to reduce shareholding period, leading to external pressureof corporate management. Hence, mangers, aware of short-term share price, may expand ortighten investment in accord with investors, i.e. give rise to catering investment behavior.This thesis releases presumptions in Polk and Sapienza's (2009) and Baker and Wurgler's(2011) models, analyzes catering investment theory in terms of market cycle, firmcharacteristic, governance structure and economic consequences, etc., and finally makes thecorresponding theoretical assumption. Meanwhile empirical study conforming to situations inChina is carried out, financial data of Chinese listed firms and reasonable proxy constructionand model selection taken into account. Specifically, it is about the following aspects,Firstly, this thesis releases the assumption of investor sentiment is homogeneous indifferent cycles and studies the influence market cycle has on such catering behavior. Owingto external investors' cognitive bias, such as self-contribution, overconfidence and dispositioneffect, with respect to down cycle of the market, in up cycle of market, corporate investmentis more sensitive to mispricing caused by investor sentiment, that is to say, cateringinvestment behavior is asymmetrical in different market environments. Secondly, this thesis attaches importance to corporate characteristic influence oncatering investment tendency. It reveals that managers in listed companies with largeuncertainty of earning expectation may have stronger catering tendency as well as managersin listed companies with high speculative. Besides, the cross-section variation may changewith market cycle fluctuations; the variation in up cycle will be more obvious.Given that managers' trade-off between long-term fundamental value and short-termprice is a key factor in catering investment behavior, this thesis releases the assumption ofother paper on exogeneity of this factor, explore the possible influence of corporategovernance, and analyzes manager holdings level and ownership structure respectively. Forthe former aspect, incentive function restriction of catering investment behavior is studied.Such restricting results differ when companies are overpriced or underpriced: when marketoverprices a company, mangers with high proportion of restrictive equity could weakencorporate catering investment tendency; when market underprices a company, the increase ofmanager holding proportion could restrict corporate catering invest tendency. For the latteraspect, effects of ownership property are paid close attention to. On the one hand, sincemanagers in state-owned firms are mostly appointed, they are more motivated to raise firmprice during their short tenure, catering market sentiment to make investment decision. Onthe other hand, their shareholding proportion increasing, the actual shareholders will tendmore to cater to market sentiment, which is more evident in state-owned firms.Fourthly, this thesis observes the economic results of catering investment behavior andpoint out stakeholders as a channel linking market and long-term corporate value afterreleasing the assumption of the invariability of constant fundamental value and optimuminvestment level under investor irrational assumption. That is, investor sentiment mightinfluence corporate stakeholders' anticipation of corporate value; when corporate isoverpriced in market, stakeholders will increase the investment and efforts of corporatecooperation, including banks' credit conditions of this company, cooperation conditions ofupstream and downstream firms, diligence of employees and so on. Such anticipation andbehavior change may improve the business environment, followed by even lower marginalcost of capital and much higher marginal revenue product of labor, which eventually bringabout corporate value enhancement and investment level optimization. In this mechanism,corporate catering investment decisions are not inefficient; this is supported by empiricalstudy on financial data in Chinese capital market.Research studies in this paper expand frontier theories of behavior corporate finance andprovide evidence and guidelines for related areas. Furthermore, results of empirical study offers basis for education of investors in Chinese capital market, design of corporategovernance structure and policy-making of regulators.