Before And After The Equity Division Reform Excessive Investment Behavior Of Chinese Listed Companies

This paper examines the extent of firm level overinvestment of free cash flow and the impact of the Split-Share Structure Reform on the overinvestment. I find evidence that, under split-share structure, overinvestment is significantly positive related with positive free cash flow and ownership concentration of the firm, which suggests that the overinvestment is a manifestation of the agency problem, including the agency problem resulted from interest conflicts between managements and shareholders and interest expropriation resulted from interest conflicts between non-tradable shareholders and tradable shareholders. After comparing the overinvestment behavior before the Split-Share Structure Reform and after, I find that the sensitivity between overinvestment and positive free cash flow decreases, and that the effects of ownership concentration on overinvestment are weakened. So I conclude that the reform reduces overinvestment and alleviates the agency problem. The evidence also shows that executive ownership incentives appear to mitigate overinvestment after the reform. In summary, the Split-Share Structure reform fixes the interest conflicts between non-tradable shareholders and tradable shareholders, reduces the interest expropriation behavior and improves corporate governance significantly.