A Research In The Effect Of Ultimate Control Rights On Over-investment

Investment has played a significant role in bolstering up the economy. Yet it is a double-edged sword, overheated investment has led to a series of questions. As enterprises are important participants in the market economy, their over-investment in the micro-level has caused macro-level investment overheating. Observed from the micro-level, over-investment is common in listed companies domestically, and this action has become one of the main factors hindering the companies to enhance the value, leading to distorted allocation of more and more social capital and restricting China’s economic development. Therefore, the scientific and rational investment decisions are of great significance both in the micro and macro level.Along with the development of study in corporate governance issues, the conflict between ultimate controller and the minority shareholders aroused widespread concern. The separation of ultimate control rights and cash flow rights reduce the cost of entrenchment, over-investment is one of forms of ultimate controller grab control-rights private benefits.After combed the related literature and theoretical results, based on principal-agent theory, this paper built a contract model of the ultimate controller and corporate investment and use a mathematical logic to deduce the process of the separation of ownership and its leading to over-investment. In research design part, this paper began with the recitation and selection of over-investment measure (discriminant) models, selected2007-2009Chinese manufacturing company which listed in Shanghai and Shenzhen Stock Exchange as the sample. Refer to the residuals of Richardson (2006) measurement model to construct the empirical model, the author quantitative analysis the degree of enterprise inefficient investment. Then selected the data from positive residual sample to multiple linear regression, it emphatically investigated the influences ultimate control rights, cash flow rights and separation of the two rights have on over-investment and the restriction mechanism of over-investment. The empirical results show:(1) positive free cash flows are ubiquitous in sample companies;(2) a listed company’s free cash flow and level of over-investment has a significant positive correlation;(3) cash flow right and over-investment has a negative correlation, the degree of separation of the two rights and over-investment has a positive correlation, and the relationship between ultimate control rights and over-investment has different results depending on the sample;(3) sending cash dividend, independent directors and equity balance all have inhibiting effect on over-investment. Finally, based on China’s specific conditions and research results, related suggestions are put forward to improve the current situation of the over-investment from corporate governance angle, the laws and regulations construction angle.The main contributions of this article:(1) combine ultimate control, cash flow rights and corporate investment decisions together in the research;(2) establish a contract model of ultimate controller and over-investment, use rigorous mathematic logic to edict that over-investment is inevitable when control rights separates from cash flow rights;(3) discuss tunneling of controlling shareholder when doing over-investment research.The inadequacies of this study:(1) there is accurate subdivision of the samples according to their the degree of separation of the two rights, as some academics have proved the impact of separation degree to free cash flow over-investment is inverted U-shaped instead of a simple positive or negative correlation;(2) out of consideration for industry characteristics, I select the manufacturing industry as the research sample with companies issuing B shares and H shares removed, thus may affect the persuasion and representativeness of the research result;(3) this article has chosen Richardson forecast investment model to estimate the expected investment and unexpected investment, based on past experience, it acquiesces that the overall investment of listed companies are at normal levels and there are no systematic errors and the default is lack of proof procedure.