Free Cash Flow Constraint,Separation Of Two Rights And Over-investment Of Listed Companies

As the most driving force and the base of the future cash flow, investment is crucial for a company, and is essential condition for a company's survival and development. Since the introduction of Free Cash Flow hypothesis by Jensen (1986), over-investment has attracted wide attention from scholars. Because of the conflict of interest between shareholders and managers, managers usually invest in negative NPV projects for their personal interests, and lead to over-investment behaviors, which cause harm to shareholders'interests and companies'value.The companies which have plenty of free cash flow are prone to over-investment.In the case of ownership concentration, the agency problem between ultimate shareholders and middle and small shareholders are becoming more prominent. As the ultimate shareholders determining companies' business decisions and the existence of conflict of interest between ultimate shareholders and other shareholders, it is worthy further studying that whether ultimate shareholders affect listed companies' investment decisions by taking advantage of their control-abilities, and then aggravate over-investment and get private benefits of control.Based on the Principal-agent theory and Free Cash Flow hypothesis,the thesis study the over-investment behaviors of listed companies and the effect of ultimate shareholders with the data of China listed companies. First, based on the investment prediction model(Richardson,2006),the thesis estimates the optimal level of companies' investment, and get the scale of over-investment and free cash flow. Then, by examining the relationship between free cash flow and over-investment, the results validates that companies which have plenty of free cash flow are prone to over-investment, and support the Free Cash Flow hypothesis. At last, by adding the variable of separation of ultimate control right and cash flow right, the thesis study the ultimate shareholders' effect on over-investment at different levels of free cash flow constraint. The results show that, in the sample which free cash flow is abundant, separation of two rights aggravate listed companies' over-investment, and the results prove that the ultimate shareholders which get private benefits of control through over-investment are required under the constraint of plenty of free cash flow.