Analysis About The Effects Of The Free Cash Flow And Financing Constraints On Over Investment

Under the condition of market economy, enterprise investment decision has a close relationship with the profitability, the management risk of the enterprise, and it affects the dividend policy of the enterprise and the ability to refinance, ultimately it affects the survival and development of the enterprise. So the investment is the key reason for the growth of companies and it becomes the basis of future cash flow, and plays a decisive role to the enterprise. Since the reform and opening up, China’s economic has great rapid speed, the scale of investment in fixed assets increased mostly year by year. But under the boom, a phenomenon of low efficiency of investment has been lurked. The scholars have pointed out that over investment is a common problem what is our many listed companies facing with. Enterprises as main part of the market economy, the excessive investment will not only influence their own development, but also lead to "overheating" of macro level, which is causing a large number of resources wasted, in other ways, it is not conducive to the sustainable and healthy development of the national economy. The over-investment problem has caused extensive concern of theory and practice research.According to Jensen’s free cash flow hypothesis and the principal-agent relationship between shareholders and managers, the more free cash flow been controlled by managers, the more excessive investment behavior appeared. According to the MM theory, in the perfect capital market, the company is not subject to external financing constraints, but due to the capital market information asymmetry between market participants, principal-agent problems and the existence of the transaction cost factors, the company’s investment decisions will be influenced by financing constraints, and by financing constraints of corporate, the investment is sensitive to the free cash flow. In our special environment system, different companies are in different degree of financing constraints, so free cash flow has the different effect of excessive investment. It has a certain practical significance to make empirical analysis of these problems.Based on these theories, this article makes the empirical test of the relationship between free cash flow and over-investment among two points of free cash flow and financing constraints, and further to consider financing constraints under the group whether there is significant difference between the two relations, using A-share listed companies as the object. First of all, this article has a review of the related literature at home and abroad, secondly, concretely introduces the free cash flow, financing constraints, and excessive investment theoretical knowledge, finally, to make the empirical research, by setting up investment forecast model, estimating moderate investment and excessive investment level, to inspection the relationship between the free cash flow and financing constraints of overinvestment. The results show that there is significant positive correlation between the excessive investment and free cash flow, in order to further study the relationship between them, this paper discusses the effect of free cash flow on over-investment under different financing constraint grouping. Based on the empirical analysis over the samples, this paper selected interest Coverage, dividend payment rate, company scale, and the ultimate control person nature as the measure of financing constraint, to research the relationship between free cash flow and over-investment under the group sample. Results show that interest Coverage as the measure of financing constraints, the lower the interest coverage ratio, the higher financing constraints of the company, the more significant influence of free cash flow on overinvestment. Based on the empirical analysis over the samples, this paper selected interest Coverage, dividend payment rate, company scale, and the ultimate control person nature as the measure of financing constraint, to research the relationship between free cash flow and over-investment under the group sample. Results show that interest Coverage as the measure of financing constraints, the lower the interest coverage ratio, the higher financing constraints of the company, the more significant influence of free cash flow on overinvestment. By dividend payment rate as the indicator of financing constraints, higher degree of financing constraints of the company, free cash flow can easily lead to excessive investment behavior, the lower degree of financing constraints, it suppresses the excessive investment behavior. By company scale as the indicator of financing constraints, with the increase of asset size, companies are more likely to leading excessive investment behavior. By ultimate control properties as of financing constraints, the local enterprises relative to the central state-owned enterprises and private enterprises hold the free cash flow are more likely to cause excessive investment behavior. According to the research conclusion, this article puts forward the relevant policy recommendations.