Empirical Study Of Overinvestment Of Free-cash-flow And Ownership Structure

Jensen (1986) argues that when a firm's managers have more cash than is needed to fund all of the firm's profitable investment projects (i.e., free cash flow), there is an incentive for the managers to invest the excess cash in unprofitable projects.Based on the Agent Cost and Incomplete contracting theory, this paper studies the ownership structure of Chinese listed companies and finds that because of the divergences of stockholders'objectives on the equity structure design and government control, the agent problem is different from the western countries'listed companies.Using the panel data of Chinese listed companies, this paper analyzes the influence of shareholder structure on the overinvestment and free-cash-flow and finds evidences of "Free-Cash-Flow" Hypothesis in capital investment.Moreover, this paper also finds that as the largest shareholder's holding increases, the overinvestment of free cash flow rises, especially in the companies controlled by the government and state-owned enterprises. And in companies controlled by private shareholder, the overinvestment of free cash flow rises as the other large shareholders'holding increases. After the Equity Division Reform, the overinvestment decreases as the manager's holding rises.