Internal Control, Free Cash Flow And Over Investment

In economics, we compare investment, consumption and export to three troikas of economic growth. As one of the troika of economic growth, investment is of vital significance in the development of national economy and security. For over 30 years of reform and opening-up, China’s investment has achieved rapid development; however, the rapid development of investment has caused the low efficiency of investment. Some scholars at home and abroad have found that there are relationships between free cash flow and over-investment. Therefore, how to inhibit the excessive investment of free cash flow has become a thorny issue that needs to be solved right now. One of the reasons for the excessive investment are that governance mechanism is not sound and internal control system is not perfect, therefore it is imperative to establish and improve the internal control system. As relevant laws and regulations are released, the enterprise internal control system construction has achieved. For research on the economic consequences of the internal control, there is little literature to explore the correlation between internal control, free cash flow, and excessive investment. Therefore, this article mainly analyzes the relations between and among internal control, free cash flow, and excessive investment.In this paper, the study found that the company of a high internal control quality is less, medium quality and the low quality of the internal control is more, which is related with the relatively late development of internal control in China, imperfect internal control standards, imperfect enforcement of internal control; there is a significant positive correlation between free cash flow and over-investment, which is consistent with the asymmetric theory, principal-agent theory, signal theory; High quality internal control will weaken the positive correlation between free cash flow and over-investment, this mainly by strengthening the internal control disclosure of information and incentive and supervision to management; High quality internal control is more likely to be effective in non-state-owned holding companies, largely because our country are still in a critical period of economic transformation and the degree of marketization and economic development level is not high enough, moreover, the institutional environment is vital for the operating efficiency of the state-owned holding company.In terms of innovation, the innovation points of this article mainly are the selected topic, the research subject and the research content. For example, the topic is novel, the existing literature are mainly from the perspective of corporate governance, debt constraints, there are few literatures to discuss about over-investment from the Angle of the internal control management, the paper enriches the way of over-investment management. In addition, this article will view internal control as a moderator variable to study the relationship between free cash flow and over-investment adjustment, from the relations of both to three, which provides a new way of thinking about the study of the excessive investment behavior of free cash flow; New research subject, this article selects the data of 2009-2013 as the initial sample, give full consideration to the timing and sufficiency of the sample, which can make the conclusion has more credibility and reliability; the research content is novel, the article folly considerate that our country are still in a critical period of economic transformation, the degree of marketization and economic development level is not high enough, China’s unique institutional environment should be brought into the scope of investigation, whether there is a certain difference between the state-owned and non-state-owned holding will be found.In this paper, the research content mainly includes the following six parts:The first part is the introduction. Firstly? this paper elaborates the selected topic background and research significance. Secondly, this paper introduces the research ideas and research methods. Finally, this paper summarizes the research contents and innovation points of this article.The second part is the literature review. From the perspective of both at home and abroad on the relationship between free cash flow and excessive investment, the economic consequences of internal control, the relationship between internal control and excessive investment, the existing literature was reviewed. On this basis, a summary of the above reviews is made.The third part is the theoretical analysis and hypothesis. Firstly, from the aspect of the principal-agent theory, asymmetric information theory, signaling theory, this paper analyzes internal control information disclosure, secondly, this paper introduces the application of three theories, in the end, we come up with three hypothesis.The fourth part is the research design. Firstly, we adopt Richardson (2006) model to measure efficiency of investment, second, we build a relevant model to study the relationship among free cash flow, over-investment and internal control, finally, sample selection and data source are introduced.The fifth part is empirical results and analysis. Firstly, descriptive statistics and correlation analysis of the main variances is made, secondly, according to Richardson (2006) model, we can estimate the excessive investment situation of the company, thirdly, we can use the related model to study the relationship among free cash flow, over-investment and internal control, and use the group between state-owned enterprises and non-state-owned enterprises, to research the regulation differences between state-owned enterprises and non-state-owned enterprises, finally robustness test.The sixth part is research conclusions and policy recommendations. Based on the above analysis and conclusions, we can put forward the corresponding policy recommendations from three aspects-raise the level of internal control, strengthen the management of free cash flow and improve the operational efficiency of state-owned enterprise.However, due to the special background of economic transition and system environment in our country, the excessive investment behavior of listed companies is more diversity and complexity, it provides great study space for research, also has brought the huge challenge for researchers. Because my knowledge level is limited, data collection quantity is large, coupled with the research time, the research scope and capacity constraints, there are many shortcomings.