Over-Investment of Free Cash Flow--An Empirical Evidence from Chinese Listed Companies

This paper examines the extent of firm level over-investment of free cash flow on Chinese capital market. Based on Scott Richardson's framework to measure over-investment and free cash flow (2006), the research introduces a new method to quantify the Chinese companies' over-investment and free cash flow, and provides evidence that in china, consistent with agency cost explanation, the mangers in the company with more free cash flow has stronger motivation to over-investment. The study suggests that firms with positive free cash flow over-invest.