Empirical Study Of Dividend Policies’ Impact On The Sensitivity Between Free Cash Flow And Non-efficiency Investment

Investment, finance and dividend policy are the most essential parts of corporate finance. Investment is not only the process of value creation, but also the starting point of financial decision. Under the circumstance of imperfect capital market, corporate don’t always realize the optimal allocation of resource, which resulting in inefficient investment. It is widely accepted that agency problem and finance constraints are respectively the main reason for overinvestment and underinvestment. According to modern financial theory, dividend policy, as a part of supervision contract, has two important functions:agitating agency conflicts and transmitting signals about corporate performance. Therefore, the dividend policy of listed company may have an important and profound effect on the investment efficiency. As our capital market hasn’t set up for a long time, the dividend policies diversify greatly between Chinese listed company and the developed countries, and is featured by low dividend level, poor continuity and a close relation with the secondary equity offering. Thus the dividend theory matured in foreign market is not always feasible and applicable in Chinese capital market. For that reason, the purpose of this paper is mainly to research how cash dividend policy affects the investment efficiency and whether the relevant theories are applicable.Firstly, this paper analyses the cash dividend characteristics by collecting the cash dividend data between the period of2000and2010, then, basing on the free cash flow theory, dividend agency theory and signaling theory, then further studies the relation of cash dividend, free cash flow and inefficient investment, and finally put up with four hypotheses. In empirical part, the paper makes use of the investment prediction model put forward by Richardson in2006to measure investment efficiency, and build the overinvestment model and underinvestment model. Then make descriptive statistics, correlation analysis and linear regression by using the listed companies’data during the period of2008and2010. The empirical results, on the one hand, show that as the increasing of free cash flow, the overinvestment becomes more serious. Meanwhile, cash dividend mitigates the sensitiveness between free cash flow and overinvestment. On the other hand, as the gap of finance constraint aggravates, the underinvestment also becomes serious. At the same time, the favorable records of cash dividend can’t alleviate the sensitiveness between finance constraint and underinvestment. The results demonstrate the dividend agency theory, but don’t support the signaling theory. I think the main reasons lies in the investors’insensitiveness to cash dividend which is caused by low dividend level and poor dividend continuity. In consideration of the results, the paper put up with the suggestion as follows:reinforce supervision, normalize the dividend distribution, perfect the dividend disclosure system and enhance the power of medium and small shareholders.The paper not only empirically verifies cash dividend’s effect on the relationships between free cash flow and investment efficiency, and enriches the previous studies, but also make suggestions improving the function of dividend policy. It has important practical significance.