Debt Structure And Inefficient Investment

The interaction between financing and investment has long been a hotly discussed topic in thefield of modern corporate finance. However, existing research has found widespread inefficientinvestment behaviors among publicly listed companies in China, and Chinese scholars have not yetto reach a consensus as to whether it is overinvestment or underinvestment that is dominating inChina. Meanwhile, research on inefficient investment has been mainly focused on measuring thedegree of inefficient investment; while overinvestment and underinvestment have been examinedseparately from each other. There is little literature focusing on the effects of debt structures onoverinvestment as well as underinvestment.We uses2,542firms listed on Shanghai and Shenzhen Stock Exchanges from1999to2011.Firstly, we use the approach proposed by Richardson (2006) to estimate the reasonable investmentamount, and then measure inefficient investment and analyze the characteristics of inefficientinvestment among public companies in China. Secondly, taking the amount of inefficient investmentas the dependant variable and debt structures categorized by their newness, sources, and maturitiesas the independent variables, we use the two-step regression method (Fama&Macbeth,1973) to testhow various debt structures affect and constrain the inefficient investment.The results show that the inefficient investment indeed widespread exists in public companieslisted on the Shanghai and Shenzhen Stock Exchanges, mostly in the form of overinvestment.Further test of the effects of new and old debt structures on inefficient investment provide us someinteresting results. Firstly, the ratio of new to old debts is indicative of overinvestment andunderinvestment; new debts exacerbate overinvestment while curbing underinvestment; in contrast,the increase of existing debts aggravates underinvestment while relieving overinvestment. Thisfinding supports well the theoretical predictions made by Li&Zeng (2009). Secondly, regardless ofwhether it’s newly added debts or existing debts, long-term bank loans have a greater impact onoverinvestment than short-term loans; in contrast, newly increased short-term bank loans have agreater effect in relieving underinvestment than long-term loans. Thirdly, bank loans have a greaterimpact on inefficient investment than commercial credit borrowings. In particular, existing bankloans have a greater effect than commercial credit borrowings in exacerbating underinvestment andrelieving overinvestment; while new bank loans have a greater effect than commercial credit borrowings in relieving underinvestment and aggravating overinvestment.