The Mechanism Study Of Product Market Competition's Influence On Firm Inefficient Investment

While the mutual relationships among product market competition (hereafter referred to as PMC), corporate governance, information asymmetry and firm investment are widely investigated in extant literature, they have not been investigated systematically. Based on the backgrounds of China's transition economy, this study develops an integrated theoretical framework incorporating above four topics, which starts from PMC and ends on inefficient investment by treating corporate governance and information asymmetry as two important mediators. By using this framework, this study analyzes the paths from PMC to over-investment or under-investment, and empirically examines those paths using a sample data of industrial companies listed in Shanghai Stock Exchange and Shenzhen Stock Exchange.This study provides evidence that PMC reduces inefficient investment by improving corporate governance and reducing information asymmetry. Because the threat of liquidation induced by PMC is not so serious and credible to the managers, the largest shareholder increases his shareholdings and constrains his behavior of tunneling while PMC becomes more severe. By taking measures like employing more independent directors, expanding the boards, and increasing equity incentive to the non-manager directors, the firms can suppress the managerial over-investment behavior effectively. However, this study finds no mediating effect of managerial compensation and ownership on the relationship between PMC and over-investment.Furthermore, this study finds that PMC reduces under-investment by decreasing information asymmetries between managers and shareholders. By providing shareholders with a comparable average profit, PMC increases the difficulties in earning management which results in less information asymmetry and then less under-investment. While voluntary disclosure results in proprietary cost, it reduces information asymmetries and the external financing cost. Therefore, PMC will encourage firms to increase voluntary disclosure which in return will reduce under-investment.Taking together, this study suggests that to reduce inefficient investment, it is necessary to continue the effort to strengthen PMC, to improve corporate governance structure, to intensify the monitoring of firms' mandatory information disclosure, and to encourage firms' voluntary disclosure.