Research On Capital Structures Of China’s Public Company From The Perspective Of Specific Human Capital

Based on the relevant theories and practices in economics and management science,author of this paper conducts a comprehensive and systematic discussion on theimportance of specific human capital in improving the corporate governance andresource distribution efficiency inside a public company through optimization of itscapital structure.The MM theory put forward by Modigliani and Miler in1958marked the birth ofmodern capital structure theory, which, after half century’s development, has become alarge system consisted of numerous branches and plentiful contents. The potentialdriving force for that is, in the author’s opinion, deep understanding of the nature of acompany’s economy. A company’s choice of its capital structure is ultimately a kind ofcorporate behavior, revealing a thorough understanding of the company’s organizationproperties such as function and boundary, which can help us to find the inherent logicbehind its option of certain capital structure. Modern capital structure theory is closelyrelated to specific corporate viewpoint. Based on the relevant corporate transaction costtheory, this paper tries to study the optimal capital structure decision from theperspective of specific human capital. Transaction cost economics is one main branch ofmodern firm theories. It is successfully applied to explain many aspects of propertiesand behavior of firm. However, capital structure theory within this framework has notbeen fully developed. And this is exactly what this paper wants to contribute to throughresearch.Debt and equity are two different kinds of financing methods and governancemodes. The former use regular ways to coordinate the relationship between investorsand firms, which, once the specific human capital is involved, will result in great bargaining costs for any adjustment after transaction.. While the latter, despite the factthat its tolerance and elasticity helps to eradicate the compulsory governance cost, willlead to incentive loss and bureaucracy cost. Such that, the option of capital structure isdetermined by properties of transactions organized by a specified firm. Once the twoelements form a good match, the transaction cost will be saved.An important development of above transaction cost analysis is to absorb somethoughts from principal-agency framework, which aims to base the understanding ofcapital structure choice on a more complete corporate theory. Given that bothprincipal-agency framework and transaction costs economics depict only some aspectsof real firms, we discuss the possibility of integrating the two theories. In the author’sopinion, a firm should be taken as an organization form which can not only adapt toboth symmetric and asymmetric information, but also provide both ex ante-incentivesand ex post-adjustments for the transactions. The decision-maker should take theresulted agent problems and interest conflicts into consideration when choosing theproper capital structure for the company. In other words, the choice of a company’scapital structure should match the ways transaction is organized. And that is exactlywhere the innovation point of this paper lies.In this part, empirical studies based on data collected from Chinese publiccompanies are conducted to inspect the two characters of specific human capital:managerial entrenchment and stock option incentive. The results show that firms havingmanagerial entrenchment bear a lower asset-liability ratio than those without it. And thetwo elements are negatively related to each other. Such correlation becomes obviousbetween managerial entrenchment and supervision of specific human capital, however.That is, strengthened company supervision can compromise managerial entrenchment and raise its asset-liability ratio. As for the self-ability of individual human capital, ithas little to do with the managerial entrenchment, which is mainly due to uncertainentrenchment status of most of the managers in China’s public companies who areappointed by strong stock holders. Studies of stock option incentive find that firms withsuch incentives enjoy lower derivation degrees of capital structure, which reveals anegative relationship between the two components.How to optimize capital structure through specific human capital? First, on the onehand, from the investor’s viewpoint, he needs to encourage his employees to invest inhuman capital; and on the other hand, the mutual dependence resulted from suchinvestment and other disadvantages coming after this, especially managerialentrenchment, must be prevented. To achieve this purpose, companies not only need toincrease the shareholding ratio of specific human capital but also need to improve itsinner governance mechanism. Second, from the human capital’s viewpoint, to protect itsbenefits, the company must match its capital structure with its human capital. With ahigher human capital, the company has to lower its equity financing and raise theshareholding ratio of its human capital to evenly share its profits with shareholders.Third, actions must be taken to improve China’s manager market and takeover marketto restrict the behavior of human capital.