Institutions Background, Leverage And Corporate Investment

A cental issue in finance is whether leverage affects investment poilcies.Neoclassic finance theory maintains that leverage is irrelevant with investment. A firm with good projects can grow no matter how its capital structure is ,because it can always find funding to invest.Considering the informational asymmetries andagency problems, modern finance theory accepts the view that leverage affects investment policies. However, there are also two sides about this view. On one side, the researchers think a firm's debt induces under-investment because leverage prevents a firm from raising funds to finance positive net persent value(NPV)projects.Namely,leverage restrains a firm's valuable investments. On the other side, the researchers think a firm's debt has a disciplinary role on over-investment, because leverage pervents a firm fromaccepting negative NPV porjects.Meanwhile,there are different empirical research condusions.Although foreign researchers find that leverage plays a disciplinary role, Chinese researchers almost don't find debt's disciplinary role.Clarifying this point is important for choosing a firm's capital structure and investment poilcies.The essay firstly construst its thoretical analysis structure about debts affects corporate investment on the basis of omnibus literature and thoretical analysis;secondly,considering our special market background,such as most listed companied were oriented from state companies,corporate debts roots in state commercial banks,government plays an indirecr or direct role in state banks and state listed companies,forthermore, the process of marketization is apparent different accounting to various district of our country,the eastern littoral has the higher marketizational process.Therefore,we choose the ratio of bank loan to total assets as the variable to weigh the leverage,from ownership propertiy and the process of marketization aspects to examine the relation between leverage and corporate investment.At last,based on 3576 listed companies' data from 2003 to 2008 which are from shanghai and shenzhen exchange, after controlling for the variables that influence a firm's investment such as Tobin's Q, sales income and cash,the essay obtains two major research findings as follows.For one thing,as far as our all listed companies to be concerned,the relation between leverage and corporate investment is negative.The negative relation between leverage and investment is weaker in firms with state ownership than in firms with non-state ownership.In addition,the negative relation between leverage and investment is stronger in firms with low growth opportunities and poor operating performance than in fims with high growth opportunities and good operating performance. Furthermore,the relationship between leverage and investment is weaker in firms with low growth opportunities and poor operating performance which have state ownership.For another,the he relationship between leverage and investment is weaker in firms with low market index than in firms with higher market index.The conclusion of this essay suggests that almost of listed companies in our countries exist non-efficency investment ,the debts donot exert its functions.Therefore, the writer suggests that we should also add the flexility of debt to advance the efficient corporate investments.Meanwhile, the" soft-budget" should be altered.