Can Bonds Restrict The Company's Ineffective Investment?

With the rapid economic development, China's ineffective investment is more and more serious,the investment efficiency is worrying. According to the Jensen (1986)'s hypothesis of free cashflow, debt and dividend could be to curb over investment. The Bond market of China isdeveloping vigorous. Although its history is relatively short and the conditions of issue is toohigh, but Bond market's development and improvement will be the major trend of the economicdevelopment. So it is very important to research the impact of Bond financing to the investmentefficiency. This paper focuses on the ordinary corporate bonds and convertible bonds on theineffective investment management function.In this paper, we based on the existing literature to research the role of Convertible bonds as oneof the most important way of financing in the control investment inefficiency. Our research isbased on the framework of Shleifer(1989), and we use70companies which issued convertiblebonds during2002to2010as our research sample. Then we use the Richardson(2006)model tomeasure the over-investment and the under-investment. After descriptive analysis and multipleregression analysis, we found that Convertible bonds can improve under-investment but can'tprohibit over-investment in a relative longer term. Result shows that convertible bonds can helpto achieve a two-way improving on efficiency of investment.In addition, we also research the convertible bonds' provision. Studies have shown that theDownward provision,the Sellback provision and the Buyback provision have no obviousinfluence in constraining over the investment behavior. And these three terms of empiricalresults and theoretical analysis falls far short of the reasons for this situation may have twoaspects: the amount of data too little and convertible bonds issue motives in China.This paper also examined the governance role of the ordinary corporate bonds ineffectiveinvestment. In the article, we use the companies which issued corporate bonds during2002to2010as our sample. The empirical results show that compared with the convertible bonds,corporate bonds has a great advantage in restricting over investment. But in the part of improvingthe under investment, convertible bond has a great advantage.