Bank Loan、free Cash Flow And Over-Investment

Since reform and opening up, the economy has entered into a rapid growth stage. Although it is worth pleased to see the high investment, high yield, high-growth, the phenomena of over-investment has occured in many industries, which has aroused great attention. In such a contex, in order to ensure that the economics develop soundly, effectively inhibiting the excessive investment is extremely urgent.In the modern enterprise, debt has been an indispensable part of capital, In1976, Jensen and Meckling began to work on debt’s governing power. This paper will carry on the study by the method combining normative analysis and positive analysis.The normative research part will try to analysis the effect of debt governance based on Free Cash Flow Hypothesis. The empirical analysis part try to examine the results of theoretical analysis by modelling some regression equations. On the basis of the previous study, this paper will do further research based on different institutional environment and put forward the suggestions and measures of perfecting our country’s institutional environment,in order to provide valuable reference for the the steady and healthy development of the economy.The logical way of the paper:with the development of the market economy, the characteristic of the separation of two rights in enterprise becomes more and more obvious, the agency problem between shareholders and managers is more and more serious, if there are a lot of free cash flow within the enterprise, managers will choose investment projects with negative net present to pursue the maximum personal benefit, which will lead to the over-investment problem. As one of the effective corporate governance mechanisms,debt should play its positive role.Because of the external supervision of the creditors and pressure of paying back the capital plus interest, the discretion power of the manager will be restricted and the behavior of abusing free cash flow will be constrained,which will have a positive effect of improving enterprise’s investment level. The debt maturity structure, nature of property right and institutional environment will also lead to the difference of effect of debt governance. Bank loans as the main source of debt in our country will also play the role. According to the logical way thinking/the paper can be divided into several parts:The first part is introduction which mainly states the background, purpose, significance, ideas and methods, framework,the main contribution and deficiency.The second part is literature review which mainly states the existence of over-investment, cause of over-investment, restriction mechanism of over-investment, comment of the literatures.The third part is theoretical analysis which mainly states the meaning and measurement of over-investment, and some basic theories such as Agency Theory, Free Cash Flow Hypothesis,Contingent Governance of Debt.The forth part is empirical research which concludes propose of hypothesis, empirical test, robustness test.The fifth part is conclusion which mainly states the policy suggestion.Through the research of above five parts, the paper draw five conclusions:(l)The free cash is positively related to over-investment.(2) Bank loan can reduce the free cash flow which can be dominated by managers and bring about the decline of level of over-investment.(3)The long bank loans can inhibit over-investment behavior more strongly.(4)The bank loans in none-state-owned enterprises have more effect.(5) In the area of fine institutional environment, bank loans can inhibit over-investment behavior more strongly.The main contribution of this paper:Firstly, the paper choose bank loan as the only angle of view, because for most companies in China, bank loans is still major financing channel of debt. Research of bank loans has more practical significance.Secondly, the paper will discuss the debt maturity structure, in order to find the difference of effect of debt governance.Thirdly, the research will divide the sample into two parts according to the nature of ownership, which will tell us that with reform in several years, whether soft budget constraints of state-owned enterprises are still higher than the non-state-owned enterprises. Forthly, the research will discuss effect of institutional environment,which help us inspect the dynamic aspect of the results of institutional environment development.The deficiency of this paper:Firstly, this paper will not study on unlisted companies,but in real life, the corporate governance structure and the level of over-investment of unlisted companies are different from listed companies. So study of the over-investment behaviors of unlisted companies also has a certain practical significance.Secondly, the institutional environment index of Fan Gang’s "China’s marketization index"just write to2009, the data of following three years will be estimated by moving average method.Thirdly, the model of Richardson (2006) is subjective, which shall be improved in the future.