Bank Connections,Free Cash Flow And Over-investment

The existence of excessive free cash flow within the company and the abuse of free cash flow is an important cause of over-investment.There is also a close relationship between bank connections and over-investment activities of companies.Establishing connections between companies and banks will reduce the constraints on corporate financing and affect the efficiency of corporate investment.Then,will the external factors of bank connections affect the relationship between free cash flow and over-investment in companies and how does that happen? The exploration of this issue has important theoretical significance for a deep understanding of the over-investment behavior of companies and the causes.This paper divides banking connections into executives and bank-enterprise shareholdings,and studies the influence of different types of banking connections on the relationship between free cash flow and corporate over-investment.This paper uses theoretical analysis of information asymmetry theory and financing constraints,principal-agent theory,and social capital theory.On the one hand,establishing bank connections can increase the availability of getting loans and the amount of loans,and can reduce the financing constraints companies face.The level of financing constraints can promote or inhibit over-investment caused by free cash flow.On the other hand,directors who have bank connections have supervisory functions,and banks which have connections with companies have external governance functions.If these functions are effectively played,they will inhibit the over-investment caused by free cash flow.On this basis,this paper selects the A-share listed companies in China's Shanghai and Shenzhen Stock Exchanges as research objects,and uses their relevant data from 2012 to 2016 as a sample to empirically test how bank connections affect the relationship between free cash flow and corporate over-investment.The results show that(1)From the overall point of view,free cash flow is positively correlated with over-investment of enterprises,and bank connections has a positive effect on the relationship between free cash flow and over-investment;(2)Different types of bank connections have different effects,executive connections will make free cash flow cause over-investment in the company,and the bank-enterprise shareholdings connections have no significant effect on the relationship between the two;(3)For different ownership systems,the effect of banking connections on free cash flow and over-investment in companies are different.Among the state-owned enterprises,all types of bank associations have an inhibitory effect on the relationship between free cash flow and corporate over-investment,and the role of bank creditor governance has shown good results in state-owned enterprises;in private enterprises,all types of bank connections have a positive effect on the relationship between free cash flow and over-investment.This paper examines the relationship between free cash flow and corporate over-investment from a new perspective of bank connections,which helps deepen the theory related to corporate investment and enriches the research on bank connections and corporate investment efficiency,provide a basis for further optimizing corporate investment decisions,improving investment efficiency and the realization of the added value of the company.