Free Cash Flow, Over-Investment In Listed Companies And Debt Governance

The main empirical tests in this thesis employ financial statement data in Chinese listed companies from 1999 to 2005. We study the over-investment in firm level with the special consideration of the institutional backgrounds in China. The main idea comes from that ultimate controller in firm has a significant impact on the investment behavior. We divide our sample by different ultimate controller. The main questions I will study in this thesis are: what degree of over-investment is in different sub-sample? What is the true motive in different sub-sample that results in the high sensitivity on over-invest and free cash flow, and do bank leverage have any effect on firm level over-investment in the soft budget constraint background in China?The studies through a series of empirical analyses suggest:1. In listed companies controlled by state, agency costs of free cash flow bring on the high sensitivity on over-invest and free cash flow, and that is especially serious in listed companies controlled by local government.2. Listed companies controlled by natural persons have the cost advantages owing to their strict internal control, but they are destined to disburse a lot of money to maintain good relations with government and get an industrial competitiveness, which show the intense inequality to companies controlled by state and may be cut down observably through increasing enterprise scale. We think the inequality in firm operation and development is the true reason for over-investment in companies controlled by natural persons, which can not be explained by agency hypothesis.3. Though bank debt leverage can restraint over-investment, but that is effective only to companies controlled by natural persons. Bank debt leverage can not restraint over-investment in state-owned companies because of the duplicate soft budget constraint in state-owned enterprises and state-owned banks.