The Impact Of Investment Opportunity On Debt Policy And Dividend Policy

Investment opportunity is the investment options that companies invest in positive net present value projects,and of course the company may take or not take this investment options.Therefore,investment opportunity is an important factor for corporate shareholders,managers and creditors in analyze the company's prospects.But the problem is,company's outsiders usually do not notice the investment opportunity,so investment opportunity should be measured by the proxy of investment opportunity.Since the beginning of 1990,many researchers researched on indicators that measure the investment opportunity,and the research shows that price-based proxy is the important proxy for measuring the investment opportunity.The company's investment needs funds to finance,and the funds can come from inside or outside the company.The sources from the outside company come from issued shares or debt;it's reflects a company's debt policy;and the internal funds are from retained earnings.The retained earnings are closely related to the dividend policy because the dividend policy determines whether the company's profits will be distributed as dividends to shareholders or will be retained for investment payments in the future.The purpose of this paper is ? to select the best indicators to measure investment opportunities;? to analyze the impact of investment opportunity on debt policy and dividend policy.The sample of this study is Shanghai A-share non-financial listed companies(618 companies)in 2011-2015.According to the industry classification,the sample is divided into two types,service companies and non-service companies,including 393 non-service companies and 225 service companies.The method of analysis in this study is Structural Equation Modeling(SEM)using AMOS Graphics 22.0 software.This study uses five indicators price-based proxy to measure the investment opportunities;MBA(market-to-book value asset ratio),MBE(market-to-book value equity ratio),VPPE(market value assets to fixed assets ratio),Tobin's Q and PE(Price to Earnings Ratio).The results of the research indicate at the following findings:First,in the overall analysis of China's Shanghai A shares,the best indicators for measuring the investment opportunity are MBA and Tobin Q.However,MBE and VPPE are also the good indicators for measuring the investment opportunity.Moreover,the classification analysis shows:research on non-service companies proves that MBA,VPPE,Tobin Q are the good indicators for measuring the investment opportunity,while research on service companies proves that when measuring investment opportunity,MBA,MBE,and Tobin Q are the good indicators.Two sample studies have shown that PE is the worst indicator to measure the investment opportunity.Second,testing the impact of investment opportunity on debt policy has shown significant results in both sample companies(non-service companies and service companies).The results show that investment opportunity has a negative impact on debt policy,which supports the agency conflict theory,which is the conflict between shareholders,managers and debt-holders.The study also shows that if the company has a high investment opportunity,the company will choose to reduce the debt.Third,the impact of investment opportunity on dividend policy shows different results in two sample companies.The results show that the investment opportunities of non-service companies have no effect on dividend policy,and the investment opportunities of service companies have a negative impact on dividend policy.These results support the agency conflict theory(the conflict between managers and shareholders),which means that companies with high investment opportunities may have low free cash flow,so the company will pay a lower dividend.Fourth,the results also show that profitability has a significant impact on debt policy and dividend policy.Profitability has a negative impact on debt policy but has a positive impact on dividend policy.