Macroeconomic Conditions, Financial Constraints And Dynamic Capital Structure Choice

In MM model, external finance is pecfect subsititue for internal finance in frictionless market. However, there is a large divergence between the capital market in reality and assumed perfect capital market. Finance dicisions of coporations are seriously influenced by macroeconomic conditions and financial constraints. The paper develops a dynamic trade-off model with endogeous choice of leverage and time-varying macroeconomic conditions and financial constraints.This paper develops a structral dynamic capital structure model with endogenous time-variant business cycle and financial constraints, and interprets optimal capital sturcture formation mechanism based on investing and financing mutual feedback. Using stochotics frontier analysis to set up an index to mearsure firms’financial constraint. Then I discuss how the effects on company’s capital structure adjustment with different marcoeconomic condition and financial constraints. I apply threshold regression method to evaluate capital structure’s non-linear adjusting process on the flucation of business cycle and financial costraints. Finally, the paper studies non-linear adjustment of cyclical firms and non-cyclical firms confront different marcoeconomic conditions and financial constriants. This study has a certain significance for the company’s optimal capital sturcture choice and the central bank’s monetary policy formulation.The main findings of this paper are followed:First, the simulation results for stuctral model show the optimal capital sturcture are negatively correlate with growth rate of cash flows, financing costs and default costs, and positively correlate with volativity of cash flows. The maximum of firm’s value are positively correlate with growth rate of cash flows, the elasticity of labor production, the elasticity of capital production and price elasticity of demand, and negatively correlate with financing costs and wage rate.Second, this paper empirical tests the impact on capital structure from macroeconomic conditions and financial constraints. The paper finds that the firm’s capital structure adjustment and adjusting speed shown a pro-cyclical phenomenon. Compare with non-financial constraints firms, the capital structure of financial constraints companies shows pro-cyclical adjustment. When economic boom, financing constraints significantly reduce to the firms, which are not sensitive to financing costs and scale factors. However, the financial constraints companies are more sensitive to financing costs and scale during economic depression. In addition, we also find that financing constraints will slow down the speed of the company’s capital structure adjustment.Third, I use non-linear panel threshold regression approach to test the effects on capital structure by time-variant factors. I find capital structure adjusting speed is pro-cyclical, and reduced by financial constraint. Tangible assets help to increase the adjusting speed of capital structure. Smaller, lower profit and higher growth firms have higher adjusting speed of capital structure. Test results are accepted by robustness check.Finally, the paper studys capital structure adjustment of cyclical firms and non-cyclical firms under macroeconomic fluctuations. The empirical results shows dynamic capital structure of cyclical firms is pro-cyclical, but counter-cyclical for non-cyclical firms. And non-cyclical firms have higher adjusting speed of capital sturecture comparing with cyclical firms. Financial constraints cause conservatiove behavior of capital adjustment. Middle-size non-cyclical firms with more tangible assets, have the quickest capital adjusting speed. And bigger cyclical firms have a quicker capital structure adjustment speed. Robustness tests show the same results.It is divided into seven charpters.Chapter 1 briefly introduces motivations, frameworks the approaches of the paper.Chapter 2 reviews the existing literatures, and highlights dynamic capital structure theory.Chapter 3, the paper develops a dynamic capital structure model with endogenous macroeconomic factors and financial constraints. And then I get closed-form solutions.Chapter 4, the paper constucts a financing constraints index by stochotics frontier analysis. The paper empirical tests dynamic capital structure under different macroeconomic conditions and financing constraints by using data of 350 listing companies.Chapter 5, the paper applys threshold regression method to evaluate capital structure’s non-linear adjusting process on the flucation of business cycle and financial costraints.Chapter 6, I split the sample into two groups according to their sensitivity to business cycle. And discusses non-linear adjustment of cyclical firms and non-cyclical firms confront different marcoeconomic conditions and financial constriants.Chapter 7 concludes.