Study on the Motives of Inefficient Investment of Listed Companies

Abstract

Based on the fundamental theory of value effects of investment, this paper investigates the motives of inefficient investment of listed company in China. Regression results using 3155 Shanghai and Shenzhen listed company observations in 2003-2005 show that investment is sensitive to cash flows when we control the growth opportunity, suggesting that some degree of inefficient investment of listed companies exists. Moreover these relationships are much stronger for state-owned listed companies. The motive test show that investment is positively correlated to future operational performance significantly for both state-owned and nonstate-owned listed companies, which means the reason why listed companies engaged in inefficient investments lies in agent conflicts between shareholders and managers, therefore the main form of inefficient investment of listed companies is overinvestment.

Key words: Financial constraints; Agent conflicts; inefficient investment; Investment-cash flow sensitivity