Theoretical And Empirical Study Of Debt Financing On Investment Behavior

According to traditional financial theory, in complete capital markets, a firm's financial policy has no bearing on its investment decisions. Ever since the 70s and 80s of the 20^th century, the research of the new institutional economics such as information economics, principal-agent theory and contract theory promote the development of modern financial theory. In a world with incomplete markets, however, agency problems inherent in interactions between shareholders, debt holders, and management, give rise to underinvestment or overinvestment incentives. A firm's financial policy may have a significant effect on its investment. Debt financing is a very important financing pattern, so the relationship between debt financing and investment decisions has become a heated topic.As to the relationship between debt financing and investment decisions, the westerns have accumulated rich literatures, but in fact China has different institutional background, For example, China's listed companies are mostly state-holding listed companies, the ownership concentration is very high, and the directors (except the independent directors) are mostly appointed by the large shareholders etc. So the above problem is not the same as that of the west. When it comes to debt financing and investment decisions in China, on one hand, loans are mainly from the state-owned bank, which means the conflicts between shareholders (and management) and debt holders are special, the bond financing is low but the trade credit is high, which means the structure of the debt holders is different from the west. On the other hand, with the development of China's capital markets, tremendous raised capital remains intact or entrusted for investment; these problems severely affect the interests of stakeholders.On the basis of Chinese particular situation, the paper examines interactions between firm's debt financing and investment decisions. It develops a framework that focuses on the role of debt financing in dealing conflicts among shareholders, managers and creditors, uses the newly research achievements of corporate governance theory through the theoretical and empirical methods. There are four conclusions. Firstly, the paper finds that debt financing has a significant negative effect on investment in the whole samples. In the high growth low CFO sub-group debt financing has a significant negative effect on investment but in the low growth high CFO sub-group it doesn't have. In a word debt doesn't inhibit the inefficiency of investment. Secondly, although short debt is widely used in China's listed companies it doesn't inhibit the inefficiency of investment. Because short debt is used for a long time. There are some restrictive factors in the domestic company bond market so the paper only discusses the relationship between the loan, trade credit and investment. Results show that the sensitivity between trade credit and investment is bigger than that of loan and investment. Thirdly, results show that there is a negative relationship between investment and leverage, but not for the absolute state-controlling firms whose corporate investment is insensitive to debt leverage under the framework of duplicate soft budget constraint among the government, banks and the firms. Furthermore, the sensitivity of investment to leverage decreases as the proportion of state ownership increases. Fourthly, in the testing procedure the paper also gets the similar results just the same as the above by using the residuals of the investment model to evaluate over-investment and under-investment. It also shows that there is no significant correlation between independent directors' proportion, the senior managers' ownership proportion, the compensation of the senior managers and the inefficiency investment. It also reveals that big shareholder's capital engross has significantly negative effect on corporate over-investment.The paper holds that the divergence of business forms may directly influence the pertinence of debt financing and investment. Therefore, only the policy made according to the correlation between debt financing and investment of different business forms is of realistic significance. As for the low growth companies, debt financing can't play its governance and supervision function. So the policy should focus on strengthening the restraint mechanism of debt financing. In terms of high growth companies debt financing constraints are the key problem disturbing these companies' development. Therefore, the paper suggests that they should foster new financing instruments; expand the financing channel by quickening the construction of coporate bond market and then satisfy the fund demand of investment.The main innovations are just as follows:Firstly, the research tries to develop a framework that pays attention to the role of debt financing in dealing conflicts among stakeholders. In order to study different debt's effect on investment decisions, it tries to explore the influence of the level of debt, the maturity structure and the category structure of the debt on investment decisions.Secondly, the paper has sampled 333 manufacturing listed companies from 2000-2006 to constitute balanced data based on which a model of simultaneous equations are applied in accordance with the trade-off theory and agency theory. This is the first attempt to study the interaction among capital structure, investment and corporate performance within a systemic framework based on past research. Our empirical results show that debt financing has a significant negative impact on investment.Lastly, in empirical analysis, the paper uses principal components methods to evaluate the investment opportunity by choosing 7 indexes based on market valuation, investment and growth rate. The paper uses the residuals of the investment model to evaluate the non-efficiency investment. Considering the situation of our country I list the residuals into three parts, the first part to evaluate over-investment and the last part to evaluate the under-investment. I also put the corporate governance factor into the inefficiency investment model to test the relationship between debt financing and investment decisions.