A Study On Managers Incentives, Over-investment And Enterprise Value

Investment as one of the three major drives of China's economic growth,plays an irreplaceable role as it does to the self-development of enterprises.Investment activiti es also carry a big weight in both occupying industrial market and enhancing their competitiveness.Principal-agent relationship,arising from the separation of the ownershi p and management of the modern enterprise,will lead to both information asymmetry and entrust-agent problems.Managements make the investment decisions,to some ext ent,considering the perspective of their own interests rather than that of shareholders.It exposes the risk of moral hazard and adverse seletion.And the campany's investmen t decisions tend to deviate from the goal of company value maximization,which bring s inefficient investment behavior.Among them, the project investment which the net present value are less than zero is over-investment.This kind of investments do harm t o the value of the enterprise.Besides,enterprises with abundant free cash flow in the pr ocess of enlarging and strengthening, also can appear excessive investment behavior. Over-investment behaviors are common in the Listed Companies in China. To mainta in the enterprise's value and self-interest, shareholders design incentive mechanism to reduce this problem. To study whether the management incentive has an inhabitory ef fects on over-investment.This paper will research the influence of management incent ive on the enterprise value through the inhabitory effects.This article has chosen the sample of 1452 listed companies in manufacturing in China from 2009 to 2013, using the measure method and econometric model from the studies on over-investment by Vogt(1994) and Richardson(2006) for reference, with residual error measuring the unefficient investment. When the residual error is more than zero, there is over-investment. When residual error is less than zero, there is under-investment. Management incentives can be divided into compensation incentive and stock incentive. In this paper, we establish two models, studying on the effect of compensation incentive, stock incentive, over-investment and under-investment on enterprise value respectively. Through empirical test, it is found that 38.2% of companies in the selected samples have over-investment behavior, which has significantly negtive effects on their value, while management incentives have the positive effect on the value. From the analysis of the sample which has been over-investment, it is found that compensation incentive for managers has negative effect for over-investment, while stock incentive for managers has no significant.