Dissertation > Economic > Economic planning and management > Enterprise economy > Corporate Financial Management

Managerial Power, Free Cash Flow and Over-investment

Author LiDongZuo
Tutor YangRong
School East China Normal University
Course Business management
Keywords Managerial Power Free Cash Flow Over-investment
CLC F275
Type Master's thesis
Year 2012
Downloads 198
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In recent years, with China’s rapid economic development, over-investment of many industries in China has become more and more active. The ineffective investment of listed companies is in a serious situation. According to agency theory, the separation of ownership and operation of the company resulted in the interests of managers and companies are not totally consistent, which makes the manager to use its managerial power for over-investment, these investments bring private benefits to the manager, but the damage the company’s value. More free cash flow of the enterprise, the more likely lead to more serious over-investment behavior.The paper based on agency theory and Jenson’s free cash flow hypothesis, define the concept of over-investment on the basis of the relevant literature and has the listed manufacturing companies in China’s Shanghai and Shenzhen stock market2008-2010as a sample. The paper verifies the agency problem between shareholders and managers in order to explain over-investment problem by studying the relationship between free cash flow, managerial power and over-investment.This paper first verifies whether the managers of listed companies would put the free cash flow to the projects which damage the corporate value, and even do over-investment. Through establishing the expected investment model, the paper estimates the residuals value and gets the over-investment spending, then establishes linear regression models to test whether free cash flow of listed companies would result in over-investment, and whether the more free cash flow would lead to more serious over-investment behavior. The results show that free cash flow and over-investment of listed companies have significant positive correlation. The paper further selects managerial power as an entry point, establishing five sub-models, to respectively test the relationships between over-investment and five variables. The results confirm that these five variables are positively correlated with over-investment, and further approve that managerial power is an factor in over-investment of listed companies under free cash flow. Finally, according to the empirical analysis, The paper come to the conclusion and put forward appropriate policy recommendations.

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