An Empirical Research On Inefficient Investment Based On Corporate Governance

Investment is the motive force of economic development and growth, whose efficiency determines the success or failure of the enterprise. However, due to the imperfect corporate governance system, inefficient investment issues widely exist in China’s special capital market. Enterprise’s inefficient investment could not completely follow the principle of value maximization, which will harm the interests of the relevant interest groups and endanger the company’s continuing operations. The corporate governance can realize the mutual checks and balances between shareholders, managers and creditors through a series of institutional arrangements, and coordinate distribution of the related interest groups for the rights of control and profit to reduce the investment risk of the enterprise. Therefore, how the corporate governance constrain enterprise’s inefficient investment has been a hot topic widely in academic and practice. But the existing research results paid less attention to small samples or private enterprises, which are more about a large sample from the Shanghai and Shenzhen stock mark or state-owned holding companies. In view of this, having 2009-2014 Jiangsu and Zhejiang private listed companies as sample data, the paper investigated the inhibitory effect of internal and external corporate governance factors on inefficient investment.Firstly, this paper reviewed and summarized the relevant documents about how corporate governance affect inefficient investment both in domestic and foreign. Surrounding the principal-agent and information asymmetry theory, this paper presented research hypotheses on the enterprise’s inefficient investment from five dimensions of ownership structure, board of directors, management incentives, creditor governance and product market competition. Secondly, combined with the concept of corporate governance, investment and private listed companies, we analyzed and summarized the status of corporate governance and investment of private listed companies in Jiangsu and Zhejiang. Thirdly, referring to Richardson residual model, we estimated the level of inefficient investment of 92 private listed companies in Jiangsu and Zhejiang. The 552 observation was classified as over-investment and under-investment group. Then through the multiple regression model of corporate governance and inefficient investment, we tested the correlation between the company’s internal and external governance factors and inefficient investment behavior. The results showed that large shareholding would lead to over-investment, and there was an inverted U-shaped relationship between large shareholding and under-investment. The equity restriction ratio and under-investment had a significant negative correlation, but weaker effects on over-investment. The board size had insignificant suppression on the inefficient investment. The independent director system was negatively correlated with the under-investment. The combination of chairman and manager and the executive compensation system had positive effect on over-investment. Managerial ownership mechanism would exacerbate the inefficient investment behavior of enterprises. In terms of external corporate governance, short-term debt was negatively correlated with overinvestment, and under-investment was positively related. Long-term debt could aggravate the over-investment. Competition in product markets didn’t play its role which could increase the company’s under-investment. At the end of the paper, some policy recommendations were made about how to perfect the corporate governance mechanism in order to optimize the investment efficiency of the private listed companies in Jiangsu and Zhenjiang province.