Dual Agent, Free Cash Flow And Over - Investment Of State - Owned Enterprises

China is facing the pressure of the macroeconomic downturn in 2015, investment decisions are more important particularly under new government’s policy focus of taking structure adjusting and reform acceleration. As one of major strategic decision, Investment is the key point of “Three-Importance& One-Large system”, it will also affect corporate’s financial risk, performance, cash flows status and valuation from external capital market. Therefore, Investment has always been the focus of the experts and scholars both in the theoretical field and the practice. Due to the historical background and unique institutional environment, SOE has the significant roll and position in our national economy. However, SOEs are always stereotyped of “expansion of preference” and “investment impulsion” in economic transition period.Most researches about the cause of over-investment of SOEs are focus on efficiency loss of principal-agent relation both in first and second kind. However, they ignored external system environment and the effect of game playing between government and corporate insiders.First of all, we built control benefit model and intertemporal decision making model from the perspective of classical theory to respectively investigate the influence of investment of SOEs from both the Chinese government and the Insider. And then we discuss how the game between government intervention and manager self-benefit affect over-investment through the frame of dual agency under the background of transition economy. At last this study empirically examines the relationship between SOE’s over-investment and free cash flow by taking state-holding listed company as the sample and analysis the underlying reasons of over-investment. The research‘s conclusions are as follow: our SOEs still have over-invested; free cash flow has a significant impact on over-investment; there is a significant difference between central and local SOE in over-investment; both government intervention and manager self-benefit lead to over-investment, and government intervention is the primary factor; however, the game between them can partly restrict over-investment. This paper’s revelation is that the “visible hand” of government can restrict manager’s self-benefit under insider control though it may have economic inefficiency. Therefore government intervention can partly be a supplement of external governance mechanism to guide SOE’s investing decision. Our study has a great significance to understand the game between the government and the insider in dual agency, and provides a useful perspective to clearly define government role and understand relationship between the government and enterprise in China’s reform.