An empirical study on the influencing factors for the over-investment of Chinese SOEs

Hou, Yang and Wu, Manling (2019): An empirical study on the influencing factors for the over-investment of Chinese SOEs.

Abstract

The efficiency of investment affects the future development of the enterprises. The relevant literature on the corporate investment shows that the information asymmetry and the conflict of agency between the executives and the shareholders of the enterprises have a significant influence on the investment decision-makings. This study uses data of Chinese SOEs to analyze the factors affecting the efficiency of capital allocation of these Chinese SOEs from the perspective of free cash flow, ownership structure, agency costs, financing constraints and government intervention. The results of this study show that the phenomenon of over-investment is relatively obvious among the Chinese state-controlled listed enterprises. The results also show that substantial free cash flow, relatively high ownership concentration and government intervention are the major factors that lead to the over-investment in these Chinese state-owned listed companies. At the meantime, the financing constraints play a positive role in restraining the over-investment of Chinese SOEs, but their effect is quite weak. Moreover, the distortions of the senior executives’ value goals lead to the failure of executive compensation mechanism and the construction of a proper governance system needs to begin with the property rights relations.

• Item Type: MPRA Paper
• Language: English
• Keywords: Over-investments Chinese SOEs Capital Allocation Free Cash Flow
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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