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This study empirically examines the curvilinear relationship between top management team task-related demographic faultlines and over-investment, as well as how biodemographic faultlines and industrial environment moderate the curvilinear relationship between task-related demographic faultlines and over-investment.

The study designs the panel data from the listed companies of China's growth enterprises board (GEB) (set up by Shenzhen Stock Exchange in 2009) in the period 2011–2016 and uses hierarchical regression analysis and grouping regression analysis in exploring the curvilinear relationship with the variables involved.

The study provides empirical insights into the relationship on top management team (TMT) task-related demographic faultlines and over-investment, as well as how biodemographic faultlines and industrial environment moderate the relationship between task-related demographic faultlines and over-investment. It suggests that the relationship between task-related demographic faultlines and over-investment is significantly inverted-U. Furthermore, biodemographic faultlines and industrial environment can strengthen the inverted-U relationship between TMT task-related demographic faultlines and over-investment.

The study investigates the influence of task-related demographic faultlines on firm over-investment. The sample is restricted to the listed companies on GEM in China and limited in size. It is also not concerned with the cross-culture contrastive analysis between the Chinese- and Western-listed companies.

The findings suggest that strong/weak TMT task-related demographic faultlines is beneficial in promoting rational investment, but medium TMT task-related demographic faultlines may lead to over-investment.

The study within the crossed-categorization theory, the study provides a contemporary research path by moderating biodemographic faultlines and industrial environments to explain the long-ignored impact of TMT faultlines within a new perspective of firm investment efficiency with a recent significant sample of new emerging countries (e.g. China).

The purpose of this paper is to examine how investors’ valuation of cash holdings is related to firm-level investment.

As prior studies note that holding excess cash serve as a driver to would be over-investing, and that over-investment imposes substantial agency costs on shareholders, the authors focus on the value implications of holding cash in the presence of over-investment from the perspective of shareholders.

By examining the publicly traded companies on Taiwan stock market, the authors uncover that cash is valued less in firms with over-investment than in those with under-investment and the magnitude of over-investment is negatively related to the marginal value of cash holdings (MVCH). It reveals that investment activities impact the value that shareholders place on cash holdings. Moreover, further tests indicate that higher block holdings and the presence of independent directors on boards can effectively mitigate the negative impact of over-investment on the MVCH.

This paper enhances the understanding of the valuation implications of cash reserves held by firms with over-investment and the effectiveness of governance structures in containing the detrimental effect of investment-related agency costs on the value of holding cash.

This paper provides pioneering evidence that outside investors discount cash assets in over-investing firms to reflect their expectations that they will not receive the full benefit of these assets; and this paper extends the literature on corporate governance by assessing the role of governance mechanisms in reversing the negative relation between over-investment and the MVCH.

This study aims to test whether over-investment is associated with environmental, social and governance (ESG) variation (i.e. inequality) across its dimensions, which, if so, would imply the prioritization of the interests of some stakeholders over those of others.

Drawing on a global sample of 29,428 observations across nine sectors and 41 countries between 2003 and 2019, the authors executed a country-industry-year fixed-effects regression analysis. In the robustness tests, this study also used the entropy balancing and propensity score matching approaches.

The authors found that while firm over-investment increases social pillar inequality, it reduces environmental pillar inequality. Further analysis revealed that the over-investment strategy decreases (increases) ESG inequality in low (high) environmental and social performers. This outcome could be of relevance to internal governance mechanisms and policymaking as ESG inequality might raise legitimacy concerns and hamper the long-term sustainability of firms.

The outcome of the study could be of relevance to internal governance mechanisms as well as policymaking. Considering financial constraints, firms should maintain a balanced strategy between firm investment and addressing stakeholder interests. Otherwise, over-investment might reduce environmental and social engagement in some dimensions, which could prompt criticisms and legitimacy concerns about firms and some stakeholders.

Past research has intensively focused on whether ESG – rather than ESG inequality – is associated with investment (in)efficiency. In addition, it has mostly formulated the causality running from ESG to firm investment, and hence, the literature lacks heterogeneity in this respect. Nevertheless, the authors believe that the potential effect of firm investment on ESG is of critical importance and has implications for determining whether over-investment causes variations across ESG engagement. Thus, the authors addressed this gap in the literature by investigating the relationship between over-investment and ESG inequality.

The purpose of this study is to analyze the extent to which under- and over-investment problems affect hotel firms’ value around the time when acquisitions are announced.

Hotel firms are classified based on their financial constraints (under-investment), corporate governance mechanisms (over-investment) and organizational structures. Multivariate analyses are conducted utilizing the panel ordinary least squares regression to examine the effects of financial constraints, corporate governance mechanisms and organizational structures on acquisition returns.

The results show that financial constraints have a larger effect on the firm value compared to the effect of corporate governance. Also, acquisitions are viewed as over-investments in poorly governed, franchising and hotel-real estate investment trust (REIT) firms.

The analyses are limited to gains from acquisitions in the hotel industry. Therefore, future studies may examine the effects of capital expenditures and cash holdings on hotel firm value.

Acquisitions could help financially constrained firms reduce informational asymmetries. Firms could expand through franchising when they are financially constrained. However, franchising firms should take restrictive actions to control managers from making acquisitions. The hotel-REIT organizational form does not seem to cause under-investment problems, and it functions as an additional corporate governance mechanism.

In addition to the C-corporation organizational structure, hotel firms extensively adopt REIT and expand through franchising, which might affect under- and over-investment problems. Nonetheless, little is known about whether capital investments create or reduce value for hotel firms. This study helps to explain how financial constraints, corporate governance mechanisms and organizational structures affect hotel firms’ value.

A series of environmental pollution issues and economic improvement go hand in hand. Since financial listed companies contribute significantly to the national economic development, China has been paying increasing attention to the development of the financial industry. The purpose of this paper is to explore the relationship among the development level of the financial industry, over-investment of the listed companies and environmental pollution through a macro-level and micro-level mechanism.

In this study, we adopt the 2011–2017 panel data of listed companies in the manufacturing industry to study the impacts of the financial industry on environmental pollution. Meanwhile, the paper uses a mediator model, and over-investment is introduced to the econometric model as a mediator to explore whether the development of the financial industry can affect the environmental pollution through over-investment.

A U-shaped relationship between financial industry development and environmental pollution was observed through a macro-perspective; additionally, over-investment of the listed companies significantly increased environmental pollution, along with a significant mediator effect of over-investment. A significant positive correlation was observed between financial industry development and environmental pollution in the East region of China, while the correlation was negative in the Central and West regions. The mitigation effect of financial industry development on environmental pollution was more significant in the low-end manufacturing industry, compared with basic and high-end manufacturing industries.

Strengthening the incentives and supervision toward company managers, reducing over-investment behaviors, encouraging suitable financial industry development to reduce financial risks, improving environmental conservation laws and regulations, and implementing stringent penalty mechanisms for environmental conservation are necessary.

The study aims to examine the association between product market competition and corporate investment decisions on, particularly, risk-taking and investment efficiency. Existing theoretical studies on whether product market competition mitigates or exacerbates agency problems are inconclusive. Prior research generally finds that competition constrains management opportunism in reporting operating performance. However, the association between product market competition and managerial investment decisions has largely been unexplored.

The primary measure of product market competition is the Herfindahl–Hirschman Index. The authors use regression analysis to examine the association between corporate risk-taking and over-investment of free cash flow (FCF) (as dependent variables) and product market competition (as an independent variable).

Using firm-year observations from 1990 to 2010, the authors find that competition encourages managers to invest in risky investment. They also find that competition disciplines management on its use of FCFs. Overall, their results provide support for the disciplining role of product market competition in management investment decisions. The results are robust after they control for shareholder activism and executive compensations.

The paper contributes to the literature by providing evidence of the disciplining role of product market competition in management investment decisions. First, the results suggest that competition encourages managers to invest in risky investment. One potential explanation for the results is that competition reduces opportunities for resource diversion for management personal benefits and, in turn, decreases management risk aversion. Another explanation is that competition forces management to take more risks for the long-term survival of the company. Second, the results indicate that competition disciplines management on its use of FCFs. Although firms in highly competitive industries make investment decisions that are less conservative, they tend to avoid suboptimal investment decisions, such as over-investment of FCF, compared to their counterparts.

With the Green Deal and Sustainable Finance Taxonomy, the European Union is driving forward its ambition for a modern, resource-efficient and competitive economy. For this reason, this paper contributes to the ongoing discussion by examining how overall corporate social performance (CSP) and the respective environmental, social and governance (ESG) pillar performance affects corporate financial performance (CFP). In addition, this study aims to present novel insights by testing a theoretically derived CSP over-investment theory empirically for the German market.

The final sample includes firms listed on the German Prime Standard (DAX30, MDAX and TecDAX) from 2015 to 2019. The study includes a correlation and regression analysis using fixed effects on 363 firm-year observations to investigate the CSP-CFP relationship. This paper applies accounting and market-based CFP measures and uses Thomson Reuters (TR) ESG scores to measure CSP.

Overall CSP, social pillar and governance pillar performance improve CFP for firms listed on the German Prime Standard. However, the study provides evidence for a value-destroying effect of CSP over-investment in the social pillar.

The implications of the study are ambiguous. First, firms can improve CFP when doing good, i.e. increase CSP. Second, however, CSP is a concept of decreasing marginal benefits. Consequently, managers can respond to increasing pressure from investors to be “sustainable” with the argument of CSP over-investment. Policymakers must consider materiality as a potential explanation for the over-investment phenomena when framing sustainable development programs, i.e. the EU Green Deal and regulations such as the Directive 2014/95/EU and the Regulation EU 2020/852. Moreover, the study sensitizes society that sustainability efforts do not exclusively affect CFP positively.

The paper contributes to CSP literature by revisiting the CSP-CFP relationship and debuting a CSP over-investment hypothesis on the German market. The results are highly relevant for practitioners, policymakers and society, as the study provides an empirical framework to evaluate CSP properly and reveals the importance of materiality in stakeholder management.

The purpose of this paper is to investigate the effects of chief executive officer (CEO) international work experience, functional background and career concerns on managerially-distorted investment decisions.

This paper focuses on S&P 500 publicly held US manufacturing companies during the period from 2009 to 2012. The data related to the CEOs’ international experience and their functional background experience are manually collected from Business Week’s Corporate Elite. Financial data is retrieved from COMPUSTAT database. The data for CEO tenure and age are retrieved from the ExecuComp database. Besides ordinary least squares regression, this paper conducts two-stage least squares regression analysis. Endogeneity and additional tests are also considered in this paper.

The findings show that CEO international work experience may not reduce under-investment, but it may exacerbate over-investment. CEO throughput functional background may exacerbate under-investment, but it may not reduce over-investment. Furthermore, CEO career concerns are useful in reducing the inefficient investments caused by international work experience and throughput functional background. These results remain similar when potential self-selection bias, as well as alternative measures of career concerns and investment efficiency, are considered.

This paper contributes to the existing literature in the following ways: first, while a significant amount of attention has been paid to how investment decisions are affected by financial reporting quality and material internal control weaknesses, there has been little evidence accumulated related to how managers’ international experience, professional background and career concerns affect investment inefficiency. The authors attempt to fill this gap. Second, the authors manually collect the international experience and functional backgrounds of CEOs working for S&P 500 US manufacturing companies. This unique data set makes it possible to complement previous studies by investigating the effects of managerial international experience and functional background on investment behavior. Finally, previous theoretical studies have long recognized that managers’ career concerns affect their corporate investment decisions. These studies suggest that young CEOs have a greater incentive to signal their abilities by adopting more active and possibly riskier investment strategies, thus raising the moral hazard problem with regard to firm investments. The authors enrich these studies by showing that work experience alleviates the moral hazard problem with respect to young CEOs’ investment decisions.

This study proposes a novel measure for management’s horizon (short-termism or myopia vs long-termism or hyperopia) derived from easily obtainable firm-level accounting and stock market performance data. The authors use the measure to explore the impact of managements’ horizon on firms’ investment efficiency.

The authors rely on two commonly used but uncorrelated measures of management performance: accounting performance (return on capital employed, ROCE) and stock market performance (average abnormal return, AAR). The authors combine these measures to develop a multidimensional framework for performance, which classifies firms into four groups: efficient (high accounting and high market performance), poor (low accounting and low market performance), myopic (high accounting and low market performance) and hyperopic (low accounting and high market performance). The authors validate this framework and deploy it to explore the relationship between horizon and firms’ investment efficiency.

In validation tests, the authors show that management myopia (hyperopia) explains firms’ decision to cut (grow) research and development investments. Further, as expected, myopic (hyperopic) firms are associated with significantly more (less) accrual and real earnings management. The empirical tests on the link between horizon and investment efficiency suggest that myopic managers cut new investments while their hyperopic counterparts grow the same. Ultimately, the authors find that myopia (hyperopia) exacerbates(mitigates) the over-investment of free cash flow problem.

The authors introduce a framework for assessing management’s horizon using easily obtainable measures of performance. The framework explains inconsistencies in prior empirical research using different measures of performance (accounting versus market). The authors demonstrate its utility by showing that the measure explains decisions around research and development investment, earnings management and firm investments.

The purpose of this study is to examine the effect of consolidating off-balance sheet entities on firm-level investment efficiency. Financial Accounting Standards Board Interpretation No. 46, consolidation of variable interest entities – an Interpretation of ARB No. 51 (FIN 46) is used as a quasi-exogenous shock to financial reporting in this study.

The authors empirically test the change of investment efficiency for a sample of firms affected by FIN 46 in the post-FIN 46 periods. In the regression, a group of matched pairs selected from unaffected firms is used as the control sample and firm characteristics are used as control variables.

The authors find that firms affected by FIN 46 experience improvement in investment efficiency after adopting the standard compared to unaffected firms. The authors also document that FIN 46 firms’ level of investment decreases after FIN 46 compared to unaffected firms. These empirical results suggest that the improvement in investment efficiency is likely to be achieved by the reduction in over-investment. Further analyses show that amongst the affected firms, firms consolidating off-balance sheet special purpose entities (SPEs) improve investment efficiency mainly by reducing over-investment, whereas firms avoiding the consolidation of SPEs do not display such tendency.

This study contributes to the literature on the relation between financial reporting and investment efficiency, as well as the literature on the impact of FIN 46. To the best of the authors’ knowledge, this study is the first to examine the relation between the consolidation of off-balance sheet entities and investment efficiency.