Abstract
This study aims to investigate the restriction effect of corporate governance on over-investment in food industry. Market value of a firm can be damaged by over-investment activities. Much effort has been made on the control of enterprises' over-investment based on ownership structure; however, limited work has been done to address the restriction effect of corporate governance on over-investment. Using the data from 2002 to 2009 of Chinese non-financial listed companies as samples, this study empirically studied the restriction effect of corporate governance on over-investment which was measured based on the Richardson model. The results show that, firstly, there is a significant negative relation between ownership concentration and over-investment, that is, concentrated ownership can restrict the over-investment. Secondly, the splitting of the positions of Chef Executive Officer (CEO) and Chairman also can help to restrict overinvestment of listed companies. Thirdly, there is a significant negative correlation between managerial stock ownership and over-investment; in other words, the over-investment in the company with higher proportion of managerial owned shares is significantly higher than that of a company with lower proportion of managerial owned shares. However, non-state-owned dependent director and board of supervisors cannot restrict the over-investment of listed companies effectively. Further evidence shows that industry competition and market process can influence the restriction effect of corporate governance on over-investment. According to the above results, this paper puts forward some policy suggestions on how to restrict over-investment of listed companies from the perspective of corporate governance.
Highlights
As one of the three core issues of financial theory, corporate investment decisions have attracted a lot of attention
Using the data from 2002 to 2009 of Chinese non-financial listed in food industry companies as samples, this study empirically studied the restriction effect of corporate governance on over-investment which was measured based on the Richardson model (Richardson, 2006)
This study introduces the Richardson model into investment decision making process to constrain overinvest problems in the listed companies
Summary
As one of the three core issues of financial theory, corporate investment decisions have attracted a lot of attention. Corporate investment is the main motivation of the firm growth and the source of the increase of future free cash flow. In the perfect world of (Modigliani and Miller, 1958), the main goal of corporate investments is maximizing the firm value and the decision of corporate investment only depends on the net value of the project and not affected by other factors. Because of the imperfect capital market in the real world, the company’s investment activities often deviate from the goal of maximizing firm value. Corporate managers always make overinvestment behavior though investing in the negative net value of the project, damage the market value of the firm (Jensen, 1986; Yang et al, 2010). The over-investment leads to the supply exceeding the market demand and resulting in the waste of social resource and lower company efficiency (Li and Li, 2011; Richardson, 2006; Yang and Hu, 2007)
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