Free Cash Flow,Cash Dividents And Inefficient Investment

As a pillar industry of China’s secondery industry, manufacturing plays a decisive role in the development of China’s economy, therefore, it is of great importance to study the investment efficiency of manufacturing enterprises and analysis the factors that have impact on the investment efficiency.In the company’s financial management, there are three important parts, namely, investment, financing and dividend distribution. Investment is the process of company’s value creation and the efficiency of investment directly determines the level of increase in the value of the company or not. In today’s changeable market environment, it is difficult for the company to take all aspects of the investment decision into account and it is also very hard for the company to achieve optimal allocation of company resources, so two kinds of inefficient investment problems occur:over-investment and under-investment. Currently, most scholars tend to attribute agency costs and finance limiting to the two causes of over-investment and under-investment. According to the modern financial theory, as part of the company’s optimal supervision contract, dividend policy has two important functions:reducing the agency costs and transferring company’s signal, and it makes dividend agency cost theory and dividend signaling theory into reality, accordingly, the dividend policy of listed companies might have some impact on the efficiency of investment. China’s capital market starts late and the associated control mechanism is not very perfect. We can find some very significant difference between them if we compare China’s dividend policy with western developed countries:such as the low dividend level, the poor dividend continuity and the higher influence by external financing on the dividend distribution. According to the comparison between China and Western countries, we can find that the dividend policy of China’s manufacturing industry currently has significant "Chinese characteristics". In view of this, the dividend theory in the more mature Western developed countries is likely not available for China’s listed manufacturing companies which have "Chinese characteristics". Based on the above article we first analysis the impact on investment of free cash flow situation and then we combine the free cash flow hypothesis, dividend signaling theory and agency cost theory with China’s manufacturing listed companies’dividend distribution information in order to examine to what point are the dividend theories applied in China’s manufacturing listed companies. At the end of the article we make four assumptions.