Ownership Structure, Cash Flow And Investment

In the financial management of modern company, investment decision, financing decision and dividend decision are the most important three decisions of the company. As the most important decision of a company, investment decision decides a company's future development and future cash flow growth, and then directly impacts on the company's dividend decision and financing decision, the company's operating risks, the level of profits and the evaluation from the capital markets for its operating results and future Performance. In a word, it is the most basis and key of the company's financial decision.At home and abroad, the research about the question of enterprise's investment decision mainly focuses on the relationship between investment behavior and financing behavior. In recent years, the relationship between investment behavior of enterprise and the internal cash flow which is an internal financing channel in company is becoming a hot issue. A large number of studies show that internal cash flow is an important factor which affects the investment, namely investment is sensitive to the change of cash flow. However, there are two different opinions on the theory explaining at this sensitivity in academic field, namely underinvestment in Financing Restriction Hypothesis and overinvestment in Free-Cash-Flow Hypothesis. This paper attempts to find the reasons why investment is sensitive to the change of cash flow from the perspective of the ownership structure.Theoretically,taking in account the factor that interest consistency between large shareholders and small shareholders from the perspective, there will be two different situations along with increasing of share proportion of the first large shareholder. When the explanation is underinvestment in hypothesis of the financing restriction, interest consistency between large shareholders and small shareholders increases first, and then declines, the sensitivity between investment and cash flow declines first, and then increase. When the explanation is overinvestment in Free-Cash-Flow Hypothesis, the sensitivity between investment and cash flow increase first, and then declines. So I try to prove that why internal cash flow from the angle of demonstration and the result that Chinese investment behavior is under-investment or over-investment.In my paper, I make demonstration analyse according to investment model, using the data from Chinese manufacturing public companies. The demonstration result is that internal cash flow notably effects on investment. It sustains the overinvestment theory of Free-Cash-Flow Hypothesis, demonstrates that controlling shareholders have the motivation that using free cash flow to do non-efficient investment, which not only infracts the interest of small shareholder, but also makes the value of company decline and block the company's development.