The Empirical Study Of Correlation Between Top-Managers' Pay Performance Sensitivity And Non-efficiency Investment

Investment decision is one of the major causes for corporation development. It is the crucial basis for future cash-flow increase, and it will affect the company's managerial risk, profitability and the capital market's evaluation of the company's development prospect. So it gets the attention from financial experts, economist and entrepreneurs. In recent years, along with the development of information economics, contractual economics as well as the behavior economics, inefficient investment phenomenon deviating from standard rule of net present values caused by information'asymmetry, agency problems and irrational behaviors has been becoming the focus of the researchers'attention. China's listed firms are under the strong control of larger shareholders, and there is much faultiness in our country's capital market, and the faultiness will influence the investment behavior and capital allocation efficiency.At first, this paper reviews the agency theory, the information asymmetry theory, the incentive theory and the enterprise investment theory to establish theoretical basis for analysis of non-efficiency investment's motive. Then according to the relative researches by scholars home and abroad, this paper investigates the relation between pay performance-sensitivity and non-efficiency investment.Focus on data of 2006-2008, using qualitative analysis and quantitative analysis method, this paper tries to reveal the relationship between pay performance-sensitivity and non-efficiency investment. Firstly, we set up an investment model, then make regression between the actual investment and the expected one. The regression residual will be sorted as over-investment and under-investment by the signs. Then we do regression between the PPS (Pay-Performance Sensitivity) and over-investment or under-investment.This paper has the results as follows:In 2006 to 2008, the under-investment rather than over-investment are prevailing in China's listed companies. The PPS indicates the intensity of the incentive. The relation of PPS and over-investment is negative, and PPS and under-investment is positive. Besides, this paper finds that ownership structure affects supervisory degree and therefore investment efficiency. So we divide companies into two groups:state-owned and non state-owned, incorporate principal-agent problems into our framework to analyze its effect on non-efficiency investment. For state-owned companies, agency problem was the dominant factor, the negative relation of PPS and over-investment was stronger than non state-owned companies. Nevertheless, the positive relation of PPS and over-investment was much obvious in non state-owned companies. Besides, for state-owned companies, financial constrain is light than non-state-controlled firms.At last, this paper provides the constructive suggestions on how to bring down non-efficiency investment by design an effective incentive system: Standardizing the government on the administrative guidance of listed companies. Speeding up the reform process of state-owned commercial banks. Improving the listed companies with investment-related legal environment. Enhancing information disclosure of listed companies'transparency.