The Effect Of The Largest Shareholder And Concentration Ratio Of Shares On Corporate Investment

Firm capital investment is one of the most important issues in corporate financial policy. For the reason why internal cash flow can influence investment there exist two alternative explanations. Free-Cash-Flow Hypothesis shows that when ownership and control are separated, managers have great discretion in the decision-making process and prefer to use cash flow to maximize their personal wealth. Consequently, managers have incentive to use the firm's cash flow to undertake negative net present value projects. Asymmetric-Information Theory believes that financial constraints lead to underinvestment, and the companies which show high investment-cash flow sensitivity have higher value. It is important to distinguish the two explanations.This paper using data of non-financial A Stock listed 1078 companies in China, 2005. We empirically investigate how the largest shareholder and concentration ratio of shares influence a firm's investment-cash flow sensitivity, and we evaluate the cause and the process of their relationship. The results are as follows. First, investment of listed companies is significantly and positively affected by cash flow. Second, when companies' stock are publicly held, the investment-cash flow sensitivity first increases then decreases as the largest shareholder's holding increases, our results suggest that there exist underinvestment problem; Third, when large shareholders are agents, the investment-cash flow sensitivity first decreases then increases as the largest shareholder's holding increases, but our results suggest there are no free-cash-flow problem; Finally, there's no overinvestment problem or underinvestment problem in government controlled companies.