The Impact Analysis Of Corporate Governance On Over-investment

For a long time, investment plays an important role in stimulating the growth of China’s economy. However, statistics show that during the decades when China’s economy is growing rapidly, investment efficiency has not increased, even declined. The investment pattern, which pays attention only to quantity instead of quality, goes against Chinese sustained economic development. Therefore, as the main body of investment, enterprises and their economic activity are of great importance. In reality, many enterprises are involved in blindly expansion, repeated construction, hasty production; these are over-investment.Specifically, over-investment refers to the activities that the company inputs its free cash flow into the project of a negative NPV. Apparently, it causes the loss of the company, even the bankrupt, therefore, since1980s this issue has aroused western academics’interests and many studies have been done. Among them, principal-agent theory, the information asymmetry theory, the stakeholder theory and the competition theory are classic ones.However, it is doubtful whether these western theories are applicable to China, what are the main reasons causing over-investment in China; naturally, these questions become the key point of domestic academics’study. Based on China’s unique background and the classic theories, this paper explores the predominant factors influencing over-investment from the perspectives of internal and external corporate governance.Using a sample of Chinese A-share listed firms during2006-2010, this paper adopts least squares method and fixed effect panel data model to empirically analyze over-investment in China. After proving over-investment does exist in china, we first analyze the influence of governance structure on over-investment from ownership structure, director board and supervisor board, manager’s incentive mechanism four parts. Then, we examine the relationship between over-investment and external governance environment which includes the governance, financial service, law service, intermediaries and technical service. Finally, according to the conclusion and problems identified in this paper, we provide some suggestions to improve corporate governance and restrain firms’over-investment.The result shows that appropriate ownership structure, governance of director board, annual salary mechanism and external environment can effectively decrease the level of over-investment; while supervisor board and executive stock incentive mechanism cannot play the proper role. Besides, it has been proved that state-owned firms have worse over-investment problems than non-state-owned firms.