The Correlation Study Of Large Shareholder’s Holding, Executive Incentive And Overinvestment

The two main corporate finance activities is investment and financing, investment activity is the basis of improving enterprise performance, and enhancing firm value. The validity of investment directly affects the development of the company as well as the future value of corporate. In recent years, the investment scale expands unceasingly in our country, the fixed assets has been in a high growth trend. However, our country is in economic transition period at present stage, its market system is not perfect, and its capital market is not mature yet. the company’s operator is vulnerable to the interference of market factors and making the wrong investment decisions. Many companies not only invest real assets, but also are keen on investing the financial products. The investment overheating phenomenon exists generally in the listed companies of our country. And the listed companies’ over-investment problem has received extensive attention of the academia and practice circles. The separation of ownership and management rights in modern enterprises has produced serious principal-agent problems. Shareholders are the real owner of the company, so they enjoy company’s residual income. But managers are the keeper of the company’s resources, they enjoy company’s resources allocation rights, and get income from exercising configuration rights. So Managers are likely to choose investment project that is benefit themselves rather than shareholder. Establishing a reasonable incentive mechanism is an effective way to alleviate the conflict of interest both of principal and agent, and it can also lessen the overinvestment question. Besides, strong stock holder universally exists in the listed companies of China. In this governance environment, strong stock holders use the voting power they hold to supervise management making and implementing decision. At the same time, large shareholders control and supervise compensation contracts’ making and implementing. So, large shareholders will affect the management incentive mechanism’s effect. Based on these analyses, this study chooses A-share listed companies as the research object, and explores how executive incentive will affect company’s excess investment. Due to the widespread exists of large shareholders in the listed companies of China, This paper further researches the large shareholders’influence on the effect of executive incentive mechanism.This study adopts the research methods of theoretical analysis combined with empirical analysis. In the theoretical research part., according to previous research and management incentive theory and the theory of investment efficiency, this paper puts forward the research hypothesis. In the empirical research part, this paper chooses Shanghai and Shenzhen A-share companies from year 2009 to 2013 as research samples, we use the study methods of scholars at home and abroad for reference, building the model of this paper. Then, this study explored the effect of executive incentive on excessive investment using statistics analysis method. In this part, executive incentive includes three perspectives:salary incentive, equity incentive and promotion incentive. We also distinguish the nature of property rights of listed companies. Furthermore, we take the large shareholders into account and further explore the large shareholders’influence on executive incentive mechanism. Finally, the paper concludes the empirical research results. And according to the research conclusion, the study puts forward two pieces of advices from two aspects of executive incentive and ownership structure to improve the efficiency of investment. We also points out the insufficient of this paper and the future research direction.The research results show that compensation incentive, equity incentives and promotion incentives are significantly negative correlation with excessive investment. The more annual salary executives obtain, the higher the proportion of stock ownership executives hold, the bigger compensation gap between executive, the less company gets to excessive investment. After distinguishing the companies’ property nature, We found compensation incentive, equity incentives can suppress overinvestment better in Non-state-owned Firms compared to state-owned firms, but the promotion incentives suppress the overinvestment better in the state-owned firms. The study also further investigates the incentive mechanism’s inhibition effect on excessive investment under the control of large shareholders. It finds that large shareholders can strengthen the executive compensation’s inhibition effect on over investment, but weaken executive shareholding and promotion incentive’s inhibition effect. Further study found that the nature of the state holding can weaken large shareholder’s adverse impact on the executive incentive effect, but strengthen the beneficial effects.The innovation and contribution this paper makes as follows:it directly explored the relationship between top-management incentive and excess investment, and distinguished the nature of property rights between different enterprises and it also did a comparative study between state-owned and non-state-owned enterprises. In addition, this paper not only studied the influence of the explicit incentive to overinvestment, but also examines the implicit incentive’s influence. Then, according to the situation of big shareholder universal exist in the listed companies of china, the article explored the large shareholders how to impact the effect of executive incentive mechanism. This paper expanded and enriched the relevant literature in the field of executive incentive and overinvestment, and the research conclusion of this paper has a certain reference value for the the formulation of compensation contracts, the perfection of corporate governance structure, so as to reduce the principal-agent problems.