Ownership Structure, Corporate Governance And Overinvestment

This paper investigates the impact of ownership structure on overinvestment in certain corporate governance environment. La Porta et al (1999) use data on ownership structure of large corporations in 27 wealthy economies and find that few large corporations are widely held, which is in contrast to Berle and Means’s image of the ownership structure of modern corporations. And these firms are typically controlled by an ultimate controlling shareholder, usually a family or the State. Previous researches, especially tunneling theory, suggest there exists conflicts of interest between the ultimate controlling shareholder and minority shareholders and the controlling shareholder tends to expropriate the interest belongs to minority shareholders, overinvestment is one kind of expropriation. I construct a research sample which consists of 330 Chinese manufacturing firms listed on Shanghai Security Exchange and Shenzhen Security Exchange from 2008 to 2009, and set up two multifactor models, and then I apply univariate analysis, ordinary least square regression and Tobit regression to the sample set. The empirical analysis indicates that:it’s more common to see firms with higher free cash flow to make overinvestment compared with firms with lower free cash flow; As the control rights of ultimate controller increases, overinvestment deteriorates; SOEs are more likely to make overinvestment compared with private firms; Within SOEs, overinvestment in local controlled firms is more serious than that in central controlled firms; Check and balance power of block holders and institutional investors can help mitigate overinvestment; The percentage of independent directors has no impact on overinvestment, the frequency of board meeting has positive relationship with overinvestment.