Commissioned By The Agent Under The Framework Of Corporate Investment Behavior

Investment is one of the major forces driving China's economic growth. However, inefficient investment behaviors, overinvestment and underinvestment, made by enterprises will lead to harmful economic volatility. The macro-concerns of investment efficiency and institutional reform cannot provide the ultimate solution to this issue, and therefore new insight is given on the micro-perspective of enterprises' decision rules and dynamic gaming between interest entities such as shareholders, managers, government and banks. Applying the agency theory and the dynamic gaming theory, this paper emphasizes on the decision-making process of enterprises, which is a new perspective in China.This paper derives the investment decision-making functions of state-owned and non state-owned and includes varied factors affecting corporate investment. We incorporate ownership intensity and investors' supervision into our framework to analyze its effect on investment efficiency. We explain how the financing difficulty of non state-owned enterprises affects their investment and discuss what role local government play on corporate investment games. We also model the dynamic investment process of state-owned and non state-owned enterprises and apply it in the multi-period investment decision-making process.The paper is organized as follows: we first review the corporate investment theories, and discuss the behavioral characteristics and objectives of the entities in an enterprise. We then set up the investment decision-making models of state-owned and non state-owned enterprises to analyze varied factors affecting the optimal investment amount and principal-agency problems between shareholders and managers. The correlation between ownership structure and investment is studied and we incorporate into our framework the external factors such as financing environment and gaming between government and enterprises. All these lead to the discussion of dynamic investment decision-making process, conclusions and policy suggestions.We reach five main conclusions. First, as constraints change, the principal-agency problem can lead enterprises to either overinvestment or underinvestment. The incentive-constraint rules are critical to the investmentefficiency of an enterprise. Second, ownership structure affects supervisory degree and therefore investment efficiency. Third, uncertainty lead to financing constraint, and gaming between banks and enterprises will decide loan amount and therefore their investment cost and capacity. Fourth, local government plays an important role in investment decision. Competition between different local governments will induce subsidiaries and result in lower efficiency and overinvestment. Finally, in the dynamic system, changes in product prices and financing cost can lead to overinvestment or underinvestment.