Research On Executive Equity Incentives,Debt Financing And Firms' Under-investment Behavior

The most fundamental characteristic of the modern enterprise system is theseparation of ownership and management.Owner of enterprise commissions the manager to run a business and make decisions,which forms a kind of typical relation(i.e.agency by agreement).However,for the enterprise,objective function between the owner and the manager may be different to some extent.And the conflict of interest exists when they make investment decisions in their pursuit of utility maximization.Under such circumstance,inefficient investment concept comes into being.It embodies that,due to the own interests and preference of managers,they overinvest the projects that presents negative net present value.At the same time,they undercapitalize positive NPV projects on account of their own risk aversion.Whether it is over-investment or under-investment,it is not conducive to maximize corporate value.Thus,establishing an effective executive incentive and restraint mechanism to guide reasonable resource allocation of corporate behavior has raised attention from theoretical researchers and market supervisors.Based on that,some empirical studies of equity incentive on the impact of investment behavior begin to emerge.The practice of equity incentive in our country began in early 1990s.Equity incentives were developed since the"Administrative Measures for Equity Incentives of Listed Companies(Trial)" was issued by China Securities Regulatory Commission in 2005,which is different from western capital market.Compared with the equity incentives system in western countries,there is a big gap in the development maturity as well as in the institutional environment.Therefore,based on special institutional environment in China,analyzing the function of equity incentive in investment efficiency will contribute a more comprehensive understanding of the influence of equity incentive on corporation value.More importantly,we must examine the role of liabilities when we examine the function of executive equity incentive in enterprise investment efficiency.Due to the factors,such as capital market inadequacy and information asymmetry,the debt financing has a significant impact on investment decision-making.Scholars presented their viewpoint that debt financing not only ease the problem of insufficient investment caused by asymmetric information,but can act as the role of information to ease the conflict of interests between shareholders and managers.Unfortunately,many literatures focus both on the influence of executive pay incentives on enterprise value and the impact of debt financing on corporate valueor on investment scale.Most of the scholars in their studies tend to separate manager incentive contract from financing structure in agency theory.The article attempts to combine debt financing with executive equity incentive in a unified framework,sampling Chinese listed companies and analyzing the combined effect on under-investment behavior.This paper is divided into the following six sections:The first section is introduction.This section mainly introduces research background and significance.It points out relevant concepts,research methods,research contents and a simple introduction of the overall framework.Besides,it illustrates the innovative points of the research.The second section is literature review.This section introduces existing research achievements,current research status and future research trends of under-investment,executive equity incentive and debt financing.There are also some literature comments for the analysis results and collation results.The third section is theoretical analysis and research hypothesis.This section combines existing literature with theoretical basis,theoretically analyzing equity incentives and the effect of governance of debt financing on under-investment behaviors.It also put forward research assumption for this paper.The fourth section is research design.This section mainly introduces the selection of research sample and the source of data.Meanwhile,it includes the selection of research models and variables in the aspect of equity incentives,debt financing and under-investment.The fifth section is empirical test and result analysis.First,according to the data of Listed Companies in our country,the investment models are regressive analyzed,and the sampling enterprises that are under investment are detected.Then,through using the data of sampling enterprise,the research make regression analysis on the model of equity incentives,debt financing and under-investment,studying the governance effect of the investment.Finally,the empirical results are tested.The sixth section is research conclusion and suggestion.This section introduces the conclusion,suggestions,limitation of this study and direction for further study.In this paper,the financial data of Shanghai and Shenzhen A-share listed companies between 2010 and 2014 are selected as samples.Based on that,the conclusions are:(1)Enterprise executive equity incentive has a significant governance effect on under-investment;(2)There is negative correlation between corporate debt financing and under-investment.This suggests that higher corporate debt has a significant inhibiting effect on under-investment;(3)corporate debt financing and equity incentive effect on under-investment is mainly reflected as substitutes.Such substitute relation is more prominent in state-owned enterprises.Innovative point of this study is:(1)to study the co-effect of executive equity incentive and debt financing for corporate under-investment.There are some researchers analyze it respectively;however,few scholars build theoretical framework for the co-effect on equity incentive,debt financing and under-investment.Under such circumstance,this study is helpful to make up a loss on the combination of executive incentive effect and debt financing effect.(2)As for the research perspective,this study regards investment as the bridge,breaking through the previous research methods that are mainly concentrated on the direct impact between executive equity incentive and value of corporate.