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Free Cash Flow and Overinvestment

Author: LiuZuo
Tutor: LiuYinGuo
School: Anhui University of Finance
Course: Accounting
Keywords: degree of competition in the industry ownership Structurelargest shareholder rights free cash flow Over-investment
CLC: F275
Type: Master's thesis
Year: 2014
Downloads: 23
Quote: 0
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Abstract


Academia has two main entry points on the study that how to inhibit excessive investment caused by free cash flow, some scholars research from the perspective of internal corporate governance mechanisms, such as Ownership structure, board governance and dividend Policies. Other scholars research from the political and economic environment which enterprises in. Although studies have achieved rich results, but did not get a unanimous conclusion. Wan Cong Ying (2011) considered, A comprehensive corporate governance mechanisms should include both internal and external governance mechanisms. Internal governance mechanisms is an important component of equity governance mechanisms, the external governance mechanism is the degree of competition in the industry.This paper theoretically analyzed the degree of competition in different industries, the relationship between equity structure and free cash flow of over-investment combined with the ownership structure of China’s listing Corporation and China’s industry competition, based on asymmetric information theory, principal-agent theory and the free cash flow hypothesis, by combing the literature and choroid including free cash flow and overinvestment, ownership Structure and over-investment caused by free cash flow, the degree of competition in the industry and over-investment caused by free cash flow.This paper selects all the data from the listed companies in the years2008-2012, Study on the relationship between ownership structure and excessive investment caused by FCF. First, divided Product market competition into strong competition market, secondary competitive market and weak competition market, analyzed these three samples by univariate and multivariate analysis of variance; establishment of free cash flow and over-investment model, ownership Structure and over-investment caused by free cash flow model, Combined with the univariate regression and multivariate linear regression, demonstrating the different ownership concentration, ownership concentration, ownership quality, will produce different constraints and control of excessive investment behavior in different competition market. Give some suggestions about how to control the excessive investment cause of free cash flow by adjusting ownership structure of the listed companies.Empirical testing results show that,(1) Positive free cash flow and overinvestment exists highly positive correlation, negative free cash flow and overinvestment exists highly negative correlation.(2) Degree of competition in the industry impact on the over-investment caused by free cash flow.(3)The differences of over-investment in state-owned shares and share-holding enterprises in the non-state are not significant.(4) Ownership concentration can effectively inhibit excessive investment caused by free cash flow, the higher the degree of competition in the industry, the more obvious inhibition.(5) The inhibitory effect on over-investment caused by free cash flow of ownership balancing was not significant in the highly competitive industry, contrary, it will significantly promote the over-investment caused by free cash flow.(6) The inhibitory effect on over-investment caused by free cash flow of largest shareholder rights was significant in the highly competitive industry, contrary, it will significantly inhibit the over-investment caused by free cash flow.

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