Free Cash Flow, Debt Limit And Over-Investment

The paper Chooses Shanghai and Shenzhen stock markets for the sample of listed companies from 2003 to 2006. According to ultimate controller's nature to divide the sample ,We study the behavior of listed companies' over-investment by theoretical and empirical.The paper mainly studys the following four aspects: 1) the overall situation of over-investment in listed companies ;2)the situation of over-investment in different ultimate controller's nature in listed companies;3)the reasons in different ultimate controller's nature that results in the high sensitivity on over-invest and free cash flow;4)discussing liabilities to have effect on different ultimate controller's nature of over-invest in the soft budget constraint background.We establish a series of econometric model to empirical analysis and find:â‘ There is agency costs of free cash flow in listed companies controlled by state, and the scale of over-investment is significant positive correlation between free cash flow.In comparison with listed companies controlled by central government, The problem is more serious in listed companies controlled by local government. Local government's control and intervention increases the scale of over-investment.â‘¡The nature of private listed companies' "grass-roots economy" is destined to disburse a lot of money to maintain good relations with government and get an industrial competitiveness, which show the intense inequality to companies controlled by state and may be cut down observably through increasing enterprise scale.We think the inequality in firm operation and development is the true reason for over-investment in companies controlled by natural persons.â‘¢Generally speaking ,liability can restraint over-investment of listed compan-ies,but that is effective only to companies controlled by natural persons. liability can not restraint over-investment in state-owned companies because of the dupli-cate soft budget constraint in state-owned enterprises and state-owned banks.