산업 내 경쟁정도가 과잉투자와 자기자본비용 간의 관계에 미치는 영향

This study investigates the effect of overinvestment that increases information risk on cost of equity capital. Moreover, the paper examines the effect of industry-level product market competition on the relation between overinvestment and cost of equity capital. First of all, the level of competition can reduce cost of equity capital by acting as external governance. Specifically, competition plays an external governance mechanism which motivates managements to exert their best efforts not to be left behind in the competition. This governance mechanism leads to the better monitoring by outside and inside shareholders, which also discipline managements to perform well to align the interest of related shareholders, reducing information risk. As a result, cost of equity capital can decrease. However, high level of industry-level product market competition may raise cost of equity capital by following reasons. First of all, industry-level product market competition can play a role in increasing managers’ overinvestment behavior in order to win in the product market competition. Biased pay-off structure between managements and shareholders may induce managers to take an excessive risk such as adopting negative net present value projects to show off their investment opportunity. These overinvestment behaviors induced by industry-level product market competition may increase cost of equity capital by increasing information risk of the firm. Second, managements have a tendency to build their own empire. This empire-building tendency stimulates managers to engage in overinvestment behavior in order to increase their discretion under the control of the managers. This tendency may increase information uncertainty within the firm, resulting in increasing the cost of equity capital, especially where there is high level of product market competition. Finally, in the pretense of high level of product market competition, managements may rarely release critical information in order to minimize proprietary costs which may occur when competing companies acquire important information. As a result, the absolute amount of information available for investors in the market may decrease, resulting in high degree of information asymmetry between managements and investors. Thus, inefficient investments such as overinvestment and high degree of information risk can be formed within the firm, leading to increasing cost of equity capital. We make an empirical test with 920 firm-year observations ranged from 2001 to 2010. To measure the overinvestment behavior, we adopt McNichols and Stubben (2008) model which is developed from traditional Tobin’s Q model. The empirical findings support the notion that industry-level product market competition acts as a negative circumstance. Specifically, overinvestment firms are more inclined to have higher cost of equity capital. These findings suggest that overinvestment is likely to increase cost of equity capital by increasing information risk among investors. We also document that the industry-level product market competition increase the relation between overinvestment and cost of equity capital. These results suggest that product market competition triggers overinvestment which allows managers to exploit the interest of related shareholders by expanding their discretion. Our findings are important and provide several valuable insights into the negative effect of industry-level product market competition on the relation between overinvestment and cost of equity capital, especially for regulators, managers, and other various outside stockholders. In addition, our paper is subject to several caveats, including measurement error for the level of industry-level product market competition, overinvestment, and cost of equity capital. However, we believe that our findings provide several valuable insight to the literature by connecting the gap between information risk and cost of equity capital.