The Impact Of Board Governance On The Overinvestment

The separation of ownership and controller in the modern enterprise led to the problem of agency cost. The free cash flow (FCF) which from it has always been the focus of the academic community. A large number of researchers show that managers are likely to invest in the bad projects with the FCF, which net present value (NPV) below zero, just for their own interest. That is over-investment. Such behavior has damaged the interests of shareholders seriously. In order to alleviate the conflicts between managers and shareholders, the company set a board of directors. A good board can help to protect the interests of shareholders from infringement which comes from the manager.At present, the point of the board governance, most researchers aimed, is that board governance how to affect corporate performance from the part of making decisions. However, about the supervision, especially for the manager, the scholar is not concerned. In this paper, we will focus on the function of supervision of the board. Taking listed companies from 2001 to 2008 as research sample, this paper studied the four aspects of the board governance:Board size, behaviors, structure and Board of incentive. This paper use an empirical analysis to study the relationship between the FCF and Over-investment. Based on the method, we known that the Board play an important role in controlling over-investment. I have the following conclusions:It is Existence of over-investment in our listed companies. FCF have a positive correlation with the over-investment. If company has a more free cash flow, the more serious over-investment will be led. And we can't decide which company have over-invest with the TobinQ.From the size of the board of director perspective, there has been greater overinvestment in the company with lager board scale. As respect to the behavioral characteristics of the board, It shows the higher level of overinvestment in the company with higher frequency of the board meeting Furthermore, the change of the chief director are supposed to draw a negative impact on the overinvestment level which arise from the constrain on the FCF. The company has undergoes the change of the chief director shows a higher level of the overinvestment than the company does not. From the perspective of the leadership structure and the board policy perspective, the structure in which the occupation for the board member and the manager combine together leads to the overinvestment so that effective surveillance function will suffer from it. It is also be found that there exists a stronger constrain on the overinvestment in the company with larger number of independent director. On the other hand, the payroll of the directors will impose positive affect in term of overinvestment constrain when the overinvestment level itself is low. Alternatively, it will reinforce the overinvestment if the payroll level of the director is high. The relationship between the proportion of the shares hold by the director and the overinvestment is not statistically significant in this research. One of the major finding is that the proportion of the shares hold by the director is extremely low in Chinese listed company(less than 3/10000) so that it does not show effective constrain on the overinvestment. It can not necessarily guarantees the effective incentive which means it does not carry the obvious significance in term of the constrain on the overinvestment. Finally, base on the research and analysis, the paper raise recommendations with respect to enhancing the operational efficiency of the surveillance function of the board and the effective constrain on the overinvestment.