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Causes and solutions to over-investment in the state-owned listed companies

Author: WuShunXiang ZhaoChangHai From: www.yourpaper.net Posted: 2010-04-04 04:56:19 Read:
[Abstract] the face of the adverse effects of the world financial crisis, China launched a 4 trillion investment in economic revitalization plan. This in the community generally agree, but also exacerbated concerns about over-investment in state-owned listed companies. This paper argues that improper government intervention, management for personal gain, the management not entirely rational, irrational investor root causing over-investment of state-owned listed companies. Accordingly, the proposed countermeasures to suppress excessive investment of state-owned listed companies.
[Keywords] state-owned listed companies; excessive investment; net present value; corporate governance; irrational


The investment is the most important strategic decisions, right or not directly determine the size of the company's value. Therefore, the efficiency of investment has always been one of the most talked about topics in the financial affairs of the company. In general, non-efficiency investments consist primarily of over-investment and inadequate investment in the two main manifestations of insufficient investment, more serious adverse consequences of excessive investment. Such as Jensen excessive investment is one of the most daunting challenges faced by all industrialized countries; Welch once said, "I am the greatest contribution to the company refused at least 1000 looks very worthwhile investment opportunities.
In order to cope with the huge impact of the financial crisis began in the United States on China's economy, the Chinese government launched a massive economic revitalization plan. These investment plans at all levels of government will eventually implement a market economy the main micro - enterprises to implement state-owned enterprises due to the natural connection between the government, not only bear the investment plan, and sometimes even to obey the direct administration of the local government arrangements. The state-owned listed companies as an excellent representative of the state-owned enterprises, may take on more tasks and therefore have an incentive to take a variety of means to grab the country's investment funds, leading to over-investment. The governance model of China's state-owned listed companies is relatively close to the German and Japanese model, Miller (1996) that excessive investment under the mode of governance in Germany and Japan, the main problems facing corporate investment decisions. Therefore, the over-investment of state-owned enterprises has been the general concern of the Chinese scholars. The Kinds and Golden Rock (2003) that excessive investment in the expansion is the main behavior patterns of state-owned enterprises; Zheng Ling (2003), Liu Changguo (2006), Li Xin (2007), Ming-Hai Wei and Liu Jianhua (2007) that the state-owned listed companies there is excessive investment issues. And the role of investment in boosting the economy based on effective investment the premise. Therefore, the analysis of the state-owned listed companies over-investment motives, proposed to suppress excessive investment strategy has a very important significance for real play to the economic revitalization of the role of investment.

Second, the over-investment in the state-owned listed companies analysis

(A) The Government intervention led to the state-owned listed companies are forced to over-investment
China from the traditional centralized power system decentralization reforms to fiscal responsibility, as well as to changes in the tax system, the local government has financial control over, causing the local government has a strong incentive to promote local economic growth, and local officials in China's assessment system is exacerbated this kind of motivation. By, Lijun Xia, and Fang Yijiang (2005) pointed out that both motivation of local governments have the ability to own internalized to the control of state-owned listed companies. Jiang Feng (2006) found that the local government control and intervention significantly increased the level of investment in local listed companies. Under the influence of the financial crisis, the central and local governments have a strong motivation for the intervention of the presence of state-owned listed companies.
(B) The state-owned listed company management for their own self-interest over investment
On behalf of the state-owned enterprises belong to the state, but must grant its management to business management, and managers will have to pursue their own private goals motivation; At the same time, there is information asymmetry between managers and investors, owners do not enough information and the ability to identify the manager is responsible, leading managers from their own interests over investment. Expansion of business scale helps operators serving consumer and other stealth incentive. For example, Conyon and Murphy (2000) found that the revenue of the operators is an increasing function of the firm size. In addition, due to the shares owned by the state-owned operators rarely, the enterprise is not capital gains, enjoy the enterprise income can not exceed the term of office. In the case of the current financial crisis, in order to improve employment, maintaining social stability, the government at all levels are state-owned enterprises to expand investment. Not consider the economies of scale and excessive investment both for the higher authorities of satisfaction and keep their jobs, or even be enhanced; can gain more self-interest. (C) the managers of state-owned enterprises due to overconfidence, herd mentality irrational factors and excessive investment
Behavioral finance theory is that the over-investment of the company's non-efficient investment behavior is not necessarily the efficiency of corporate governance and lack of incentives, and may be closely related to psychological factors and decision-making behavior traits and managers brought. A large number of studies have found that people's decision-making process and information processing methods do not follow the Bayes rule. Whether individual investors, institutional investors still have a large number of theoretical knowledge background and information superiority will be subject to a variety of cognitive and psychological deviation. Thus, although the manager is committed to maximize enterprise value. May also be due to managers overconfidence, irrational herd mentality error of judgment on the investment prospects of over-investment behavior.
A large number of domestic and foreign studies found that the company's management overconfidence tendency overconfidence lead managers overestimate the gains of the project, leading to over-investment. Managers may also be in the reasons for establishing and reputation maintenance, saving the cost of the search and processing information, shirk their responsibilities, reduce fear and take the herd behavior; investment in face of the country's massive economic revitalization plan, the state-owned listed companies are likely to be excessive investment .
(D) managers in order to meet market expectations irrational and excessive investment
Behavioral finance is that investor sentiment will affect the investment behavior of enterprises. First, investor sentiment through financing mechanisms affect corporate investment. Investor sentiment will lead to overvaluation in stock prices, companies tend to equity financing, in case there are a lot of free cash flow, often leading to over-investment. Secondly, due to the presence of the receivership, dismissal external threat, the rational managers are sometimes forced to succumb to investor sentiment in decision-making. When investors are too optimistic about the prospects for businesses, managers even if understanding the real situation will be worried that cause stock prices to fall due to to refuse investors are optimistic about the project lead to take over the risk, or dismissed right. Such investment decisions are often forced by investor sentiment led to over-investment.
Of state-owned enterprises, the Government as a major shareholder with non-enterprise to maximize the value of multi-target, and the expansion of the scale of the company often contribute to the realization of diversity goals, coupled with superior ability to control the government of the state-owned listed companies in the current period of expansion of the entire government investment is more prone to over-investment.

Third, the state-owned listed companies over-investment disincentives

Analysis for the above reasons, we have taken measures to curb over-investment of the state-owned listed companies from four aspects:
(A) reduce the direct administrative intervention, the use of market-oriented measures to guide rational investment behavior of state-owned listed companies
Administrative intervention on the one hand is not conducive to the long-term development of the state-owned economy; administrative intervention often comes with certain subsidies and preferential, and thus contrary to the purpose of fair competition, and also distort resource allocation behavior. Direct administrative intervention of the state-owned listed companies should reduce promotions or subsidies and other market-oriented means to reasonably guide all kinds of enterprises to actively participate in national investment plans in accordance with the actual situation of their own, adopted in accordance with the project, in order to achieve a rational allocation of resources, and reduce the excessive investment behavior of state-owned listed companies.
(B) to improve the corporate governance system, effective supervision and incentive management, to prevent the pursuit of self-interest and excessive investment
Hart pointed out that good corporate governance mechanisms can be effective constraint managers "moral hazard" self-seeking behavior, thereby reducing the over-investment of the enterprises. Rlchardson (2006) found that effective governance structure to reduce the over-investment; the Wei Ming Hai, Liu Jianhua (2007) also found that the company's internal governance structure and the improvement of the external governance environment excessive investment behavior of state-owned enterprises will be restricted. Therefore, to improve the corporate governance mechanism is the key to prevent over-investment by the management of the state-owned listed companies for personal gain.
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