Distortion of Corporate Investment Decision by Agency Problem and Irrationality

摘要

Because of the separation of ownership and control, the asymmetry of information, and the existence of supervision cost in modern company, manager has the capability of investing corporate resource to non-profit projects; moreover, manager ' s payment is proportional to corporate scale. So manager has ability and motive to throw corporate free cash on non-profit projects that could bring private benefit, which leads to the distortion of corporate investment. Besides, corporate manager's cognitive bias and irrationality also could affect corporate investment decision-making process and result directly and deeply, such as over-confidence, envy psychology, risk aversion, loss aversion, and confirmation bias. The paper analyses corporate investment distortion from both agency theory and behavioral corporate finance theory which provide theory foundation for financial system reform, economic policy choice, and the promotion of investment efficiency of Chinese companies.