Study On Relationship Of Free Cash Flow,Growth And Over-Investment

Since China’s reform and opening up,the growth of the investment to promote economic rapid development in our country, it will inevitably cause "investment overheating" problem and has constantly drawn people’s concern.Investment decision is the starting point of financial management,it can directly affect the efficiency of the company’s investment efficiency,and also can indirectly affect the company’s financing decisions, dividend decisions, and so on.The management of blind investment cannot achieve enterprise resource optimal configuration and will waste company resources cause damage to the enterprise value.There are many reasons lead to over-investment behavior,such as the abuse of free cash flow,the diversification strategy to expand enterprise scale,managers’ pursuit of high growth and the problem of shortage of managers’ motivation.These reasons are from The Principal-agent Theory and The Asymmetric Information Theory.Then,we discusses the over-investment behavior of listed companies based on free cash flow and corporate growth,and we put forward some questions :Whether or not Free cash flow lead to listed companies’ over-investment behavior?Is there a difference between that the over-investment level that the different of listed companies’ free cash flow and growth?Is will affect the enterprise value in over-investment behavior?This paper applies The Principal-agent Theory and The Asymmetric Information Theory to analyze the influence of listed companies’ over-investment on Free cash flow and growth,and reaches the following conclusion based on listed companies’ data from 2009 to 2013 in Shanghai and Shenzhen stock:(1)Listed companies in our country exists the phenomenon of over-investment,there is apparently positive correlation between free cash flow and over-investment degree.This paper adopts Richardson’s thoughts to set up an expected investment estimation model to measure listed companies’ over-investment in Shanghai and Shenzhen stock and finds out there is over 40% of over-investment in samples, which indicates there is relatively serious over-investment in listed companies.According to Principal-agent Theory,listed company presents the over-investment problem gradually after the separation of ownership and managerial right.The managers of listed companies to get more benefits and realize their “own empire”,increased the blind expansion of motivation under the imperfect supervision system lead to he phenomenon of over-investment.If managers have the right to use free cash flow,they will put free cash flow as the tool of excessive investment.As result,the more free cash flow of listed companies is,the greater the scope of the free cash flow can control by the managers,the more serious over-investment is.(2)Company growth will affect the degree of over-investment of listed companies,low growth of listed companies’ over-investment degree are higher growth listed companies.With the fact of free cash flow,rich free cash flow and low growth of listed companies are the most serious over-investment degree than others.According to different conditions, the overall sample is divided four groups in this paper and regress test to each group samples,the results are consistent with article assumes.Rich free cash flow and low growth of listed companies are the most serious over-investment degree,Rich free cash flow and high growth of listed companies are not significant regression results,it may be this company regulation strictly or governance mechanism is perfect,even there have the amount of free cash flow,they will also curb over-investment.Or may be high growth can be cover up the over-investment problem.In addition, the two groups of low free cash flow of over-investment degree are lower than the high free cash flow and low growth group.Thus,the conclusion of this article is that rich free cash flow and low growth of listed companies are more serious over-investment degree than others poor free cash flow and high growth of listed companies.(3)The over-investment of listed company problems seriously affected enterprise resource configuration,it lead to lower corporate investment efficiency,than damage the interests of shareholders and contrary to the enterprise value maximization at least.This paper argues that there is apparently negative correlation between the enterprise value and over-investment degree,that our listed companies’ over-investment increase the burden to the enterprise and deviate from the principle of the enterprise value maximization and hinder the development of enterprise.The article still to return to the inspection of the sample group under different conditions.The results show that the enterprise value of rich free cash flow and low growth group is the lowest, this group of over-investment degree damage to the enterprise value seriously and over-investment is the most serious problems.This paper consists of five chapters as follows:Chapter One is an introduction to research background and significance,writing ideas and research methods,and outline;Part Two is the literature review,which mainly focuses on the research literature of over-investment,free cash flow and growth and provide theoretical basis for later analysis and research;Chapter three is the theory analysis of free cash flow,growth and over-investment,main content includes over-investment’s concept,types,causes and The effects of free cash flow and growth of over-investment;Chapter four is an empirical analysis of relation of free cash flow,growth and over-investment.First of all, according to the theory put forward some assumptions,and describes variable measure method, and according to the hypothesis to build model,then use the empirical method to test and obtain corresponding results,finally, explain to the empirical results;Part Five is a research conclusion, suggestions and deficiencies,Main that put forward methods and policy Suggestions to reduce the over-investment of listed companies,and pointed out the shortcomings in this paper.