Liang Yong, Gan Sheng Dao, Liu Haiyue

(Business School, Sichuan University, China)

 

 

Abstract: Free cash flow is one of the factors that influence over-investments. Due to information asymmetry, Chinese listed corporations’ unreasonable ownership structure and limited corporate governance, to satisfy the company management’s needs, they abuse free cash flow to expand investment projects and enlarge their controlling desire, which caused serious excessive investment consequences. With the shareholding ratio and their own professional advantages, institutional investors have a restrictive effect upon the over-investment of free cash flow. Based on the analysis of excessive investment related hypothesis, this paper analyzed A-share listed corporations in China’s Shanghai and Shenzhen Stocks Exchange from 2008 to 2012. The results revealed that free cash flow and over-investments had a significant positive correlation, and the institutional investment ownership and free cash flow had a negative correlation, which had a certain binding force on the company’s over-investments.

 

 

Key words: institutional investors; free cash flow; over-investments

 

JEL codes: G34, G30, M41