Relevant Research Of Free Cash Flow, Cash Dividend And Overinvestment

According to Jensen’s free cash flow hypothesis, overinvestment is management investing free cash flow to negative present value projects. In China’s state owned corporations, overinvestment is more severe because of problems such as hidden owner, emptification of corporate governance, unreasonableness of shareholding structure, and the capital market being in an immature stage. The common overinvestment situation has seriously restricted value enhancing of state owned corporations. We can see from the definition of overinvestment that the reason of it is extra or over free cash flow. Under the circumstances of uneven profit and asymmetric information, management tries to invest by making use of free cash flow, or even invest in negative net present value projects to maximize self-interest, thus resulting in overinvestment. In order to restrict overinvestment, we need to limit free cash flow. The most direct way is to issue cash dividend. The relatively high cash dividend payment rate decreases free cash flow, restraining in some degree the chances of investment in negative present value projects, thus limiting overinvestment.This paper took advantage of accounting, management, and econometrics, conducted research in literature research, theory research, and empirical research etc, and studied in depth about relevance among free cash flow, cash dividend and overinvestment based on state owned list companies. The paper tested sensitivity of state owned company’s free cash flow and overinvestment, and the effect cash dividend has on overinvestment. Specific policy suggestions were made according to research results.This paper mainly focused on the following:first, testify if there’s any overinvestment in China’s state owned list companies. We found out that overinvestment is common after theoretical analysis and empirical tests. Secondly, tested the relevance between free cash flow and overinvestment. It showed positive relevance between free cash flow and overinvestment according to models constructed. And companies with positive free cash flows are more likely to overinvest. Third, tested the limitation effect cash dividend has on overinvestment. Empirical research and comparative research showed that in state owned list companies, cash dividend is not very effective on restricting overinvestment. Lastly, specific policies&suggestions were made on improving state owned cooperation dividend policy, standardizing bonus hand-in system and perfecting state owned capital budget.The creative points of this paper lie on:first, the sample is based on state owned list companies. The past relevant researches were sampled on list companies as a whole. The state owned list companies are the main subject of national economy, there’s strong realistic meaning choosing state owned list companies. Secondly, from the agent by agreement’s point of view, combining overinvestment with cash dividend through free cash flow widens the vision and field of state owned company’s management. Third, there’s strong timeliness and high reliability with improving state owned corporations’dividend policy as foothold and theoretical references made through empirical research.