An Empirical Study On The Influence Of Managerial Discretion On Investment Opportunity Sets

Managerial discretion is the latitude of power and action which managers have in making decisions and taking actions. The investment opportunity sets(IOS) are positive NPV projects owned by corporation which is an important part of the enterprise value. The implement of IOS is rest with the manager to a great extent, so managerial discretion will affect the IOS. Accordingly, using sample of Hushen 300 stocks of China listed corporation in 2005, this paper study how about the managerial discretion influence the IOS, in order to optimize arranging managerial discretion and provide empirical evidence for promoting enterprise value.Firstly, the current studies about managerial discretion are summarized thoroughly. Then, the intension, influencing factors about managerial discretion and IOS are expounded; especially managerial discretion affects IOS from the aspect of corporate governance is emphasized in the theory. Because IOS's effective measurement is the basis of other empirical studies, according to the sample of China listed corporation during 2001 to 2005, this paper empirically study about the measurement of IOS in order to differentiate and analyze IOS proxy variables. The result of empirical test indicates that E/P and CAPX/BA are the best proxy variables and we use them measuring the IOS. On the basis of above study, the influence of managerial discretion on IOS's structure equation model is proposed and empirically tested.The results of empirical study indicate that the managerial discretion positively affect IOS in total. From the aspect of direct influence, Managerial negatively affects the IOS. But from the aspect of direct influence, managerial discretion play an important role in heightening the managerial level of corporation which impersonally broaden the IOS so that managerial discretion positively affects IOS. So, this paper basing on the empirical test puts forward that heighten the level of managerial discretion and bestows broader latitude of action and scope of power to managers, consequently IOS would be enlarged. Meanwhile, we should constantly improve the corporate governance mechanism in order to form a favorable restriction mechanism which constrain the level of managerial discretion, consequently manager opportunism action which induced by managerial discretion would be constrained.