Research On Relationship Between Company’s Debt Financing And Over-investment

With the rapid development of China’s economy during recently years, the phenomenon of inefficient investment is very common in many companies, especially for those listed ones. Over-investment is one of the most important reasons of the company’s inefficient investment. When a company possesses enough cash flow, in order to pursue their own interests, the people of company management tend to make the decision of over-investment, which deviates from the maximization of firm value, wastes enterprise resource and eventually impedes the development of the company.In our country, private enterprises have become a crucial component of China’s economic system in the course of reform and opening up. Their behaviors of investment play an important role in the growth of national economy. However, with the development of economy and the introduction of modern management system, especially under the macro environment of the government’s economic stimulus program of4trillion Yuan to cope with subprime crisis in the year of2008, the behavior of over-investment is also prevail in private enterprises. Based on this economic reality, in this paper, on the theoretical basis of agency theory, free cash flow hypothesis and debt constraint theory, at the same time, by the way of combing theory and practice, financial data of private listed firms during2008-2010was used as a sample to empirically analyze the following hot issues:whether the behavior of over-investment exists in private list firms under principal-agent theory; will the free cash flow aggravate over-investment; whether the debt constraint have inhibiting effect on the firm’s over-investment.The article undertakes a number of empirical tests and gets some useful conclusions as follows.(1) The correlation between overinvestment and free cash flow of private listed companies is obviously positive. At the same time, the existence of positive free cash flow is more likely to lead to overinvestment behaviors. Thus free cash flow hypothesis is proved.(2) Empirical results show that enterprise debt can constrain excessive investment behaviors. Another point of view, the short-term debt can play a significant constraint effect for over-investment, while the long-term debt plays a limited role, even exacerbates the over-investment behaviors. Compared with the state-owned enterprises, the debt in private listed company can inhabit over-investment effectively.Western theories and empirical results show that corporate debt governance role has been well reflected in China’s private listed companies. But from the view of the term structure of debt, long-term debt and over-investment are positively correlated, reflecting on the longer the corporate debt maturity, more serious its agent problem becomes. For the above findings, the authors try to make some explanations, and put forward appropriate policy recommendations. Firstly, increase the proportion of long-term liabilities appropriately. From the liabilities of the period point of view, to enhance the inhibitory effect of over-investment.Secondly, improve the relevant laws and regulations, and establish an effective debt service protection mechanisms.Thirdly, our country should actively develop the bond market to diversify issuers, and at the same time, simplify related procedures for issuing bonds. In short, these measures can create opportunities for enterprise liability to play an effective constraint effect...