Research On The Excessive Investment Of Free Cash Flow Based On Debt Constraints

With the continuous development of our economy, enterprises have hold sufficient capital for their business. This makes the enterprises'competitiveness be enhanced . All of this are associated with the investment behavior. However, due to various social needs and natural resources, the impact of investment behavior should follow the objective law, otherwise it will lead to excessive investment, and enterprise and social cause unnecessary losses.The development of enterprise makes the management of discretionary cash flow of more and more, while free cash flow provides a wealth of material basis for the company's over-investment behavior. Meanwhile, the changes in modern business model and corporate separation of ownership and management rights enable the rights of management to have more investment decision-making choices. All of this require the company management with a rational mind, so we could have a reasonable allocation of corporate resources and enterprise maximum value of financial goals. Therefore, the distribution of profits is the primary problem for the realization of enterprise value and meet the interests of shareholders.As the existence of agency costs and opportunism, the company management may concerned about the personal interests when they make investment decisions, this will damage the interests of shareholders and corporate. Studies found that, which company with sufficient free cash flow, their management would tend to choose over-investment and funds capital into investment projects which more than the optimal scale of investment or investment of less than zero net present value. This will damage the interests of other stakeholders. In the environment of China's steady economic growth and enterprise generally has free cash flow, whether the management is really from the perspective of the interests of shareholders to make optimal investment choices, became the focus of widespread concern for company owners and creditors.From the company point of view , in order to effectively suppress the non-efficient investment behavior of management, ease the conflict between the company shareholders and the management , theorists raised a number of governance mechanisms, such as independent director system, shareholders control a large number of shares, management incentive mechanism etc. The domestic and foreign scholars have test the contents and effect of these control mechanism.Since the MM theory has been proposed, many companies choose to use financial leverage to raise funds for debt management, this model not only brought excellent profit to the enterprise, but also brought a new corporate governance system to theorists. The use of debt financing to improve the capital structure can constrained decision-making behaviors of management and maximize enterprise value. Debt service on the business effectiveness can alleviate the shareholders - manager conflict of interest, limit management to put free cash flow on a negative NPV project. In addition, the repayment of debt principal and interest expenditure will also reduce corporate free cash flow and the over-investment behavior of management which master idle capital. Therefore, borrowing debt can reduce the over-investment behavior of companies. This control mechanism over the investment behavior of listed companies in the West has been confirmed by empirical research, but because the listed companies in China have a special system background, debt control mechanism on the investment behavior of listed companies in China have not been uniform recognition.First, we have read a large number of literature. With the MM theory, agency theory, free cash flow hypothesis and the theory of debt financing, we analysis of the listed companies free cash flow problems and proxy issues, propose hypothesis with the actual situation. And then select the 2006-2008 A-shares in Shanghai and Shenzhen listed companies, excluding the existence of financial anomalies during this period and incomplete data samples, etc., eventually identified 617 manufacturing companies for three consecutive years of total of 1851 samples.According to Jensen's free cash flow hypothesis we proposed to set up expected investment model, estimate the expected investment spending of listed companies. At the same time, come the company expects investment spending over the situation. Meanwhile, we test the relation of free cash flow and investment in the sample enterprises, to discuss whether the China's listed companies existence over-investment behavior and whether such acts result from the management of opportunistic motives. In order to help companies use debt control mechanism rationally, thereby enhancing the enterprises greater value and enhance competitiveness.In the empirical analysis, this paper construct a model to analyze the behavior of over-investment in listed companies and debt control mechanism, the relevant steps and are as follows:1. First, verify the existence of investing-cash flow correlation in China's enterprise, we plan by use the investment and free cash flow to test the free cash flow hypothesis in our country. The results showed that the sample of enterprises between over-investment and free cash flow significant positive correlation.2. Then, further testing whether the companies to invest in cash flow correlation is caused by the management's opportunism. The results show that investment cash flow correlation is the result of opportunism by management to confirm that the sample firms by over-investment.3. Finally, by adding variables of borrowing debt management mechanism to test the binding mechanism in China, test results show that the debt borrowed play a limited role in corporate over-investment behavior.