Research On The Effect Of Debt Financing On Firms’ Over-Investmen Behavior Based On The Control Of Large Shareholder

Investment decision and financing decision are the core activities of an enterprise. With new system economics such as principal-agent theory, information economics and contract theory development, modern corporate finance theory deems that investment and financing influence, interact and depend on each other. Using the theory of free cash flow, signal transaction and controlling, the foreign scholars research the relationship between financial leverage and investment from the view of governance mechanisms. The existing theory and empirical research show that there is negative relationship between leverage and investment, especially in the low growth companies, due to the hard constraint of leverage. But this based mostly on the dispersed ownership structure. Because of the equity concentration of listed companies in China, the principal-agent conflict between shareholders-managers is no longer the major conflict. Conflict among the big shareholders and minor shareholders is the core, which may cause even more serious over-investment. So, from the large shareholder’s control, the paper researches the relationship between leverage and over-investment.First, this paper summarizes related literatures and empirical studies both in foreign and domestic, in order to find the direction of an in-depth research. Secondly, analyses market circumstance of financing and investment decision making which our country’s listed companies face. Based on the situation of centralized ownership structure, chapter four mainly analyzes the private benefit of control which is the core of agency problems between controlling shareholders and minority shareholders, establishes a model of debt financing to major stockholder’s over-investment governance, and through this model discusses debt financing to control the major stockholder’s over-investment behaviors. Finally, gives an empirical study on the impact of debt financing on the controlling stockholder’s over-investment behaviors based on the listed companies of manufacturing industry in China from the source of debt, current liability and ultimate owner. From the studying, some conclusions were found as following:(1) In the whole samples group, the cross term coefficient of leverage and separation of two rights is significant negative, regression result indicates that debt financing restrains firm’s over-investment.(2) The cross term coefficient of short-term debt and separation of two rights is significant negative, while long-term debt and separation of two rights’cross term coefficient is insignificant. Regression result indicates that short-term debt plays a governing role on the firm’s overinvestment, but long-term debt fail to exercise its role of governance.(3) The cross term coefficient of bank loans and separation of two rights is significant negative, while commercial credits and separation of two rights’cross term coefficient is insignificant. Regression result indicates that bank loans can restrict overinvestment, but commercial credits can’t.(4) Leverage and separation of two rights’cross term coefficient is significant negative both the state-owned group and the non-state-owned group, but the negative relationship in the non-state-owned group is stronger, especially bank loans, which indicates that bank loans’ governance were reduced by soft budget constraint arising from government and bank.