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Research On Over-investment Behavior Of China's Listed Companies Based On Free Cash Flow Hypothesis

Posted on:2010-09-22Degree:MasterType:Thesis
Country:ChinaCandidate:R TaoFull Text:PDF
GTID:2189360278972458Subject:Accounting
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In recent years, over-investment of many industries in China has become more and more actively with rapid development of capital markets. The ineffective investment of listed companies is in a serious situation. And over-investment is one of the reasons that cause ineffective investment. The companies which have free cash flow are prone to over-investment. Over-investment will affect the operational efficiency of the companies and bring heavy burden to the companies. According to Jensen's free cash flow hypothesis, this paper tries to interpret the over-investment of listed companies in China and find out the factors affecting investment of companies.The most important of all, this paper verifies whether corporate managers prefer causing the firms to grow beyond the optimal size to paying free cash flow out to shareholders for their own profits. In other words, I verify whether corporate managers incline to over-investment with high levels of free cash flow. This paper sets up a model to measure over-investment first, and estimate listed companies' over-investment. According to measure the relativity between free cash flow and over-investment, I draw a conclusion that, consistent with agency cost explanations, over-investment is concentrated in firms with high levels of free cash flow. But when free cash flow is negative, the relativity between free cash flow and over-investment is not significant. At the same time, the companies are prone to under-investment when free cash flow is negative. Finally, I examine whether firms' governance structures are associated with over-investment of free cash flow. The evidence suggests that certain governance structures, such as the proportion of independent directors, appear to mitigate over-investment. But other factors such as the proportion of institutional investors, supervisory committee system and managerial ownership don't have significant impact on mitigating over-investment. This suggests that there are many efforts to make to improve the governance structures of listed companies in China.
Keywords/Search Tags:free cash flow, agency cost, over-investment, corporate governance
PDF Full Text Request
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