| Investment and financing are two aspects of funds flow, financing is the source of the funds, and investment involves the allocating of the funds, so they influence each other. In the long time of past, however, they are tackled separately not only in theoretic or practical activities. Although, many people have realized this problem after second thoughts in many views, but what attracting scholars attentions is the one way influence of financing on investment under some friction factors. In the perspective of tax benefits and bankruptcy costs, this paper analyzes the tow way influence between investment and financing by the means of theoretic analysis. Under the guide of the generalized theoretic results, studies the relations of investment and financing empirically with the sample of listed companies in China, and figures out the unreasonable factors in the decisions of investment and financing of the listed firms, which helps us put forward the countermeasures. The contents are listed below:(1) It analyses the interrelations of investment and financing decisions theoretically, in the respective of tax benefit and bankruptcy cost. Firstly, it analyses the interrelations of investment and financing decisions in a simple model of project investment and financing. And it finds out that, debt financing will increase investment because of tax benefit, but bankruptcy cost will prevent otherwise, at the same time, investment would also increase debt financing because of interest tax shields. Therefore, there exists a static harmonizing relation between investment and financing decisions. This relation still holds even in the firms aiming at equity maximizing, but the relation between investment and financing will change little because the equity holder would over-investment due to their behavior of tax benefit over-pursuing, which will increase the risk premium of debt financing and hence decrease debt financing accordingly. Secondly, for the reason of tax substitute effect of depreciation, the model further introduce the harmonizing relation between investment and financing when there is depreciations, and it reveals that depreciation will increase investment but decrease debt financing, and it will control the over-investment problem of stockholders. Thirdly, for the reason that the cumulative assets and debt would change the status of the existed tax benefit and bankruptcy, it develops the former model by introducing cumulative assets and debt, and emphasizing on the analysis of dynamic relation between investment and financing decisions. The results reveal that the past investment will decrease the existed bankruptcy risk and increase net tax benefit of debt financing, which will help to increase debt financing. On the other hand, cumulative debt would also boost and control investment by tax benefit and bankruptcy risk respectively. At the same time, after comparing circumstances of equity maximizing and value maximizing, it finds that, equity holder would shift from over-investment to under-investment along with debt financing when there is no bankruptcy risk before investment, and otherwise if there is bankruptcy risk before investment, accordingly, over-investment will decrease debt financing and under-investment will increase debt financing.(2) It examines the static harmonizing relation between investment and financing empirically with the information of Chinese listed firms, under the guide of the theoretic results summarized formerly. The results reveal that, on the one hand, debt financing would increase investment level due to tax benefit of debt, and even on the high level of debt the positive relation still unchanged, on the other hand, in order to exploit tax benefit, the firm will raise investment funds partially from debt, and thus the positive effect of investment on debt financing, but it will become not significant when the debt level or the depreciation level is high. Further more, after comparing the circumstances with debt agency conflicts, if bankruptcy risk increasing after investment, due to much severer over-investment problem in equity concentrated firms, the positive effect of debt financing on investment will be stronger than firms with dispersed equity. And it also shows that depreciation can control the over-investment problem in firms with dispersed equity, but otherwise in firms with concentrated equity. On the other hand, if risk decreasing after investment, due to much severe under-investment problem in equity concentrated firms, the positive effect of debt financing on investment will be offset to some extent. Due to the problem of over-investment, firms with dispersed ownership will lessen debt financing in the low significant degree, but firms with concentrated ownership, which have severer over-investment problem, will significantly add debt financing. Due to the problem of under-investment, the firm will reduce the existing debt as the countermeasure, but the firms with concentrated ownership will reduce less while they encounter severer under-investment problem.(3) It examines the dynamic relation between investment and financing because of the link of tax benefit and bankruptcy. The results reveal that: 1) Investment would increase effective tax rate, which means the value of debt tax shield. But debt tax shield value would prompt debt financing in firms with low financial constraint, and would restrain debt financing in those with high financial constraint. 2) Investment would increase bankruptcy risk and thus restriction effect on debt financing. Although high growth firms might decrease risk level after investment, but the evidence does not support it. In low growth firms, because of over-investment problem in equity concentrated firms and the bias of decision technique in equity dispersed firms, investment does not decrease risk but increases it. 3) Debt financing would decrease effective tax rate, and tax rate will exert budget constraints, so debt financing prompt corporate investment for the link of tax factors. 4) Debt financing would increase bankruptcy risk, and in the whole, bankruptcy risk will restrict investment. But with low growth opportunity, firms with concentrated ownership would over-investment with cumulative bankruptcy risk, therefore the negative effect of risk on investment will decline, but this is not true in firms with dispersed ownership because of the non significant under-investment. Besides, because firms with high growth would not under investment, so the negative effects of risk on investment would not be strengthened.(4) It puts forward the relative countermeasures for the distorted behavior of investment and financing: firstly, to foster and develop institutional investors, and to set up and perfect the bond market, in order to introduce personalized equity holders and bond holders; secondly, to perfect selection mechanism of executives, as to foster decision-makers with high efficiency; thirdly, to improve operation circumstances of bank, release the governance power of banks.The new point of this paper includes:(1) Based on the models of investment and financing, it analyses not only the static harmonizing relation but also the dynamic relation between investment and financing, for the reason of tax benefit and bankruptcy risk. At the same time, it compares the relation in the circumstances of equity maximizing and that of value maximizing, and reveals the alienation of the relation between investment and financing when existing debt agency problems.(2) It proves the static harmonizing relation due to tax benefit and bankruptcy cost in our country. And it finds out that, equity holder in firms with risk rising would over-investment, which would not decrease debt financing however. Equity holder in firms with risk declining would under-investment, and comparing firms with dispersed equity, that with concentrated equity would adopt fewer countermeasures.(3) It examines the dynamic relation due to tax benefit and bankruptcy cost. It finds out that debt financing would lessen tax burden and thus promotion for investment, and it would at the same time increase bankruptcy and thus restriction on investment on the whole. But for the reason of over-investment in low growth firms, risk restriction on investment would be rebated. Investment would increase tax rate, and thus gain in value of debt tax shields, so investment would increase debt financing. Investment would promote bankruptcy risk, and thus investment would exert negative effects on debt financing.
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