Debt Heterogeneity,Cashflow Volatility And Over-Investment

In recent years,supply-side reforms in China's economic sector have achieved certain results,but structural imbalances caused by long-term over-investment have existed.Due to the inefficient expansion,some companies have defaulted on debt,for example,in 2015,Tianwei Group was forced to file for bankruptcy and reorganization due to serious overcapacity.In 2018,Jiangsu Dunan Group and Shanghai Zhongji Group falled into debt crisis because of blind investment.In the past decade,the capital used for investment has mainly come from debt in China's companies and it is still controversial about whether debt can intensify or weaken over-investment in the theoretical circles.As China's financial market is still in the development stage,due to the non-market credit rationing mechanism and the weak creditor protection mechanism,some debt contracts exhibit strong soft budget constraint characteristics,which hardly exert the governance role.Therefore,in China,when studying the relationship between debt and over-investment,the debt should be specialized into various debt instruments based on the debt heterogeneity hypothesis,and then the relationship of heterogeneous debt instruments with over-investment should be further examined.Additionally,in order to adapt to the "new normal" mode of economic development,Chinese companies are constantly trying to change the industrial layout and structure.Due to the lack of investment experience in related fields and changes in the external market environment,such as: the gradual escalation of US trade friction,the frequent fluctuations in raw material prices,and the tremendous changes in the international political environment,the business performance of companies has fluctuated greatly and the volatility of cash flow of the companies is increasing.Under this circumstance,companies are more willing to adjust financing rather than investment in response to the rise of cash flow volatility.Compared with debt financing,the cost of equity financing is higher and approval procedures of equity finance are more stringent.Therefore,nearly half of companies will increase the debt to cope with the rise in cash flow volatility.Under the debt heterogeneity hypothesis,the manager's financing decision for heterogeneous debt instruments will change in response to the increasing of cash flow volatility,thus affecting the debt heterogeneity characteristics of companies.Will the relationship between debt and over-investment be affected when the debt heterogeneity characteristics of companies change with the cash flow fluctuation? This article attempts to seek answers through theoretical analysis and empirical tests.Based on the basic theory of non-efficiency investment,related theory of debt governance,cash risk management theory and related theory of debt structure,the thesis analyzes the relationship between cash flow volatility,debt heterogeneity and over-investment mainly from the following three aspects: Firstly,under China's institutional environment,the debt can be subdivided into operating credit(mainly including: payables and advance receipts,bills payable,etc.)and financial debt(mainly including: bank loans,bonds payable)from the perspective of risk heterogeneity,and the thesis analyzes the current situation of debt heterogeneity of listed companies in China under this classification.Secondly,the thesis analyzes how the debt heterogeneity can affect the corporate agency cost and over-investment from the perspective of "debt heterogeneity degree" and "heterogeneous debt instruments".Thirdly,combined with the previous discussion,the thesis further analyzes how cash flow volatility can change the relationship between debt and over-investment by affecting the characteristics of debt heterogeneity.The thesis takes the A-share listed companies from 2012 to 2016 as the research object,and adopts theoretical and empirical analysis method to obtain the following research conclusions:(1)The degree of heterogeneity of corporate debt in listed China's companies is generally high.The degree of heterogeneity of corporate is relatively low when the debt of the company is dominated by operating credit.The degree of debt heterogeneity of enterprises gradually rises as the proportion of financial debt increases.And the company who holding more bonds or long-term bank loans has the greatest degree of debt heterogeneity.(2)Under the different debt heterogeneity characteristics,the governance effects of debt on over-investment are different.As far as the relationship between heterogeneous debt instruments and over-investment is concerned,the operating credit arising from the product market are less interfered by non-market factors,and the debt contract has a hard-constrained feature,which can effectively suppress over-investment,that is,as the proportion of operating credit increase,company's over-investment behavior will decrease.On the contrary,the existence of China's non-market credit rationing mechanism and weak investor protection mechanism makes financial debt very soft in terms of budget constraint,thus the financial debt exacerbates over-investment behavior,that is,as the proportion of financial debt increases,company's over-investment behavior will increase.Secondly,in terms of the relationship between the degree of debt heterogeneity and over-investment,for the companies with lower degree of debt heterogeneity,the debt mainly consists of operating credit.For the company with high degree of debt heterogeneity in company,the portion of financial debt increases.Therefore,with the increasing in the degree of debt heterogeneity,there are more creditors of financial debt which in turn promotes over-investment.(3)Cash flow volatility has a regulatory effect on debt heterogeneity and over-investment.The high cash flow volatility increases the expected bankruptcy cost of the company.Under the current institutional environment in China,financing cost of the operating credit in the enterprise is almost zero,the financing risk is low.But the financing cost and financing risk of the financial debt are significantly higher than the operating credit.In order to cope with the rise in bankruptcy risk caused by high cash flow volatility,companies tend to reduce financial debt,but will maintain certain financial flexibility by increasing operating credit.However,the companies with over-investment behavior generally face lower financing constraints and are easy to get long-term bank loans at a low-cost.With the increase in cash flow volatility,the over-investment companies will maintain financial flexibility by increasing long-term bank loans beside increasing operating credit.On the one hand,the increase in the level of operating credit means that more suppliers act as creditors to supervise the investment behavior of companies.On the other hand,higher cash flow volatility increases the risk of default on debt,and the supplier usually adopts measures such as: formulating more stringent credit policies,frequently communicating with customers,and strengthening the management of customer credit files to strengthen the supervision of customer business activities.Therefore,compared with companies with low cash flow volatility,operating credit are more negatively related with over investment in the companies with high cash flow volatility.In addition,for companies with over-investment,the proportion of long-term bank loans in financial debt rises as the volatility of cash flow increases,in this situation,the composition of financial debt concentrated in long-term bank loans.And it is found that the performance of long-term bank loans is mostly dependent on the external system,which makes the long-term bank loans show the strongest soft budget constraint in China.Therefore,with the increase of the proportion of long-term bank loans in financial debt,the promotion of over-investment has been strengthened.Therefore,compared with companies with low cash flow volatility,financial debt have a greater role in promoting over investment in companies with higher cash flow volatility.The research innovation of the thesis is mainly reflected in the following three aspects:Firstly,based on predecessors' research,the thesis summarizes the specific characteristics of debt heterogeneity from the aspects of "degree of debt heterogeneity" and "the features of heterogeneous debt instruments",and enriches the theoretical research literature on debt heterogeneity.The thesis provides a new perspective for the study of capital structure of Chinese enterprises.In addition,the thesis also analyzes the current situation of debt heterogeneity of listed companies in China through empirical research,and provides empirical evidence for related research.Secondly,when discussing the relationship between debt heterogeneity and over-investment,the existing literature mainly subdivides debt from the perspectives of heterogeneous source and heterogeneous maturity of debt,and then explores the relationship between debt heterogeneity and over-investment.Based on China's institutional environment,the thesis breaks down debt into operating credit and financial debt from the perspective of risk heterogeneity.The thesis examines the current situation of debt heterogeneity of listed companies in China.And the thesis also discusses the governance effect of heterogeneous debt on over-investment.Thirdly,based on China's current institutional background,the thesis analyzes the mechanism of cash flow volatility,debt heterogeneity and over-investment.The existing literature mainly discusses the relationship between cash flow volatility and investment and financing from the perspective of debt homogeneity.The thesis breaks through the limitations of current research and deeply analyzes how cash flow volatility can change the mechanism of debt heterogeneity,and then adjust the mechanism of debt and over investment,which enriches relevant literature and related research on corporate investment and financing.