The Research On The Effect Of Product Market Competition On Over-investment

Former literatures show that over-investment is a common problem in listed companies over past few years in China.Most of these papers which study about the governance of over-investment,concentrate on internal governance mechanisms,debt financing and dividend payments.Few of them consider product markets competition,which is one of external governance mechanism.In fact, such external governance mechanism,as product market competition,is more basic than internal governance mechanism.From the condition,motivation and governance of over investing in China,this paper presents product market competition can mitigate over-investment by three ways,reducing the degrees of information asymmetry,forcing the managers to work harder as to reduce the agency costs directly and prompting the shareholders to improve corporate governance as to reduce the agency costs indirectly.Then I find evidence that product market competition can mitigate over-investment of listed companies during the period 2006-2008.Further more, I divide the whole samples into two groups.One group concludes state-owned companies,the other one concludes the rest samples. Then I regress respectively to make a contrast.I find that product market competition can mitigate over-investment significantly in the first group,but the mitigation is not very significant in the second group.It illustrates that product market competition is the major instrument in mitigate over-investment in state-owned companies because its governance mechanism is invalid,while non-state-owned companies depends less on product market competition since governance mechanism is more valid.This paper tries to analyze how product market competition affects over-investment comprehensively.And it presents that creating competitive product market is important in mitigating over-investment of state-owned companies,while improve governance is more effective in non-state-owned companies.