An Study About Overinvestment Of Chinese Private Listed Companies

Investment activity is one of the most important ways of allocating resources.A company must try its best to allocate assets to the project which is benefit to its business goals because of the limited nature of resources.So whether investment behavior is valid is very important to the company.However,in reality,company’s investment decisions are often affected by other factors because the market is not perfect,such as the ethical risk of managers caused by the inconsistencies of interests between corporate management and shareholders because of principal-agent problem and the changes of macro-level economic policy.In imperfect markets,corporate management driven by self-interest may invest in some projects with negative net present value and result in company’s excessive investment behavior.From the actual situation,it is a widespread existence of blind investment and diversification in China’s listing corporations.China’s private listed companies generally tend to hold a lot of cash inside due to asymmetric information,agency costs and the uncertainty of the external environment,which will make the company’s management over-invest and reduce capital efficiency.And compared to the natural political ties of state enterprises,private enterprises have a strong incentive to establish political ties with the government in order to reduce their financing constraints and get more government subsidies,which may result in that government intervenes in private enterprises and led to over-investment behavior of enterprises.Based on balance theory,agency theory of cash holdings and rent-seeding theory,social capital theory and resource dependence theory of political association,this paper analysis the private enterprises’ over-investment influenced by the excess cash holdings and associated political influence as well as the regulation of political association by the data from 2004 to 2014 of private listed companies in Shanghai and Shenzhen.The results show that excess cash holdings and political associate are general in private listed companies and would lead to over-investment behavior.Under political association,the influence of overinvestment caused by excess cash holdings is more serious.Compared with previous research,innovation of the paper lies in the following aspects: Firstly,we introduce excess cash holdings to the overinvestment behavior,and analysis the relationship between excess cash holdings and overinvestment.Secondly,we analysis the regulating effect of political association between excess cash holdings and excessive investment.Finally,we take private companies as the research object,which effectively remove the influence of the natural political association in the state enterprises,and therefore the results of the study are more persuasive.