Do Firm Have Target Capital Structure?

Do firms have target capital structures? The exsiting research provides completely different conclusion. The trade-off theory argues that firms have target capital structures,and they will adjust their capital structure to the target level by the different financial behavior;However,the pecking order and market timing theory argue that firms do not have target capital structures. Whether the firms have target capital structures? The most direct way is that tests the capital structure mean regression hypothesis through the change and adjustment behavior of capital structure firstly,if supported, it provides prerequisites for that firms have target capital structures; Secondly, tests the impact of different theories on capital structure changes, if the trade-off theory through inspection, implies the firms have target capital structures; if the pecking order and market timing theory through the test, shows that the firms do not have target capital structures.Another way is to observe the effects of events on the capital structure through investment matters,such as capital expenditure or M&A. Because of the existence of adjustment costs, firms don’t often substantially adjust their capital structures frequently,but M&A is one of the major events can significantly change the firms’ capital structures, firms need to raise external funds for M&A,so,the firms have access to capital markets, and can adjust their capital structures to target level with the lower adjust cost and the faster adjust speed. The company’s investment is linked with capital structure decision through M&A.So, M&A provides a opportunity to observe the firms to adjust their target capital structure to target level.Through mergers and acquisitions financing adjustments can observe the behavior of the company’s capital structure, which provides a good laboratory for the target capital structure research of company. If the company is through the mergers and acquisitions financing to the target capital structure due to recapitalization, the company can prove the existence of an indirect target capital structure. Furthermore, the adjusting effect of the mergers and acquisitions on the capital structure may be an active target adjustment, it also may be an indirect effect caused by mergers and acquisitions act. So, this dissertation focuses on the impact of the mergers and acquisitions on the.capital structure of the test. In this dissertation, the research samples are from505M&A transactions occurred in China in the years2007-2009. In order to test whether the company exist target capital structure, the author based on the theory of capital structure and mergers and acquisitions, combined with our special system environment by dynamically adjusting the behavior of the acquiring company’s capital structure study. The test results indicate the presence of target capital structure of the company. And specific test results are summarized as follows:(1) The capital structure of the existence of mean reversion hypothesis can be tested by constructing the capital structure of the mean regression model. The test results indicate the presence of mean reversion phenomenon of capital structure, i.e., the company may have a target capital structure.(2) This dissertation estimates the average speed of the capital structure’s dynamical adjustment by using a standard partial adjustment model and the associated regression estimation methods. And he test results support a dynamic trade-off theory of capital structure, and then the existence of target capital structure is theoretically proved.(3) In order to verify the presence of the target capital structure, we joined alternative variables of the other two main competing theories (the pecking order and market timing theory).The test results did not refuse the importance and existence of the dynamic trade-off theory, while the pecking order and market timing theory fail to explain the company’s capital structure change, which further confirmed the presence of target capital structure of the company. And the results indirectly prove that adjustment cost hinders the target adjustment behavior of the capital structure.(4) In order to test the assumption of target capital structure adjustment, we investigated the effects of target capital structure of the acquiring company on mergers and acquisitions financing choice, and constructed similar to the "debt-equity selection model", i.e.,the M&A financing choice model. The test results shows that leverage inadequate acquiring companies tend to choose debt financing method compared to the over-leveraged acquiring companies when choosing M&A financial methods.In addition, we found that the explanatory power of the pecking order and market timing theory of capital structure is also relatively weak, when the acquiring companies choose M&A financial methods. Therefore, we believe that the choice of mergers and acquisitions financing policies is affected by target capital structure, then the firms will adjust their capital structures to a target level by choosing the financing methods, which support the target capital structure adjustment hypothesis. Furthermore, the company confirmed the existence of target capital structure from the mergers and acquisitions financing policy practice.The innovation of this dissertation is mainly reflected in the following three aspects:(1) The dissertation breaks down "barriers" between the market for corporate control theory and the capital structure theory. Considering the mergers and acquisitions as an opportunity to the company’s capital structure adjustment, and studies the evolution an dynamic adjustment process of the acquiring company’s capital structure. This dissertation provides new research ideas and perspectives for capital structure theory research through the study on the acquiring company’s capital structure adjustment speed and adjusted methods, and also by test the existence hypothesis of target capital structure. What’s more, it achieves the market for corporate control theory combined with the capital structure theory; while the previous studies mostly from the perspective of financing activities to study the dynamic adjustment behavior of the capital structure, or from the perspective of investment activities (such as mergers and acquisitions) to verify the existence of target capital structure, without further studying the behavior of dynamic adjustment of capital structure.(2) The dissertation tests trade-off theory, pecking order theory and market tuning theory simultaneously. Considering the assumptions testing for whether there is target capital structure in the company as the main line, combining the three major competing theories of capital structure (trade-off theory, pecking order theory and market timing theory), and throughout the text. In the process of testing the existence hypothesis of the target capital structure, the dissertation takes the three major competing theories of capital structure into the constructed model (modified partial adjustment model and M&A financial methods choice model) for testing simultaneously, making conclusions more persuasive. Whereas previous literatures rarely take the trade-off theory, the pecking order theory and the market timing theory into the model for comparative research, but merely focus on a separate theory, therefore the conclusions may be incomprehensive.(3) Three kinds of research idea(angle) parallel to full-text. The dissertation from three points of views verify the existence of target capital structure:︰sing analytical and empirical studies, to theoretically prove the dynamic trade-off theory exists and is dominant theory, thus proving the firms exist the target capital structures; on this basis, from the practice to prove the acquiring company’s financing policy exists target adjustment behavior of captial structure;②Learn Armen Hovakimian and Guangzhong Li (2011) research ideas and methods, firstly, build the partial adjustment model to prove the existence of target capital structure, and according to "Debt-Equity choice model", building acquisition financial method choice model to prove the acquiring company exists target adjustment behavior of capital structure;③Analysis of the capital structure adjustment method:First, estimate average adjust rate of the acquiring company’s target capital structure, to prove the existence of the target capital structure of the company, and then, from the specific adjustment acts of the acquiring company’s capital structure, to prove the existence of target capital structure of the company and target adjustment. Thus, the three angles or research ideas throughout the the full text, and make the logic more closely, more rich content,and breaking some defects of a single angle or research ideas that may exist.