Study On Financing Structure And Corporate Governance

The Chinese capital market is still an emerging market in a transforming economy. The strengthening and completion of corporate governance mechanism there has only just started to make some essential progress. Hence, many problems inevitably come along with the corporate governance of the listed companies. On the other hand, problems like preference to financing through shareholder ownership and low efficiency in capital allocation are quite common. Thus such research topics as how to broaden ways of financing, change financing patterns, improve corporate financing structure and corporate governance would be both of theoretical and practical values. This paper focuses on company financing structure and corporate governance, it combined the characteristics of Chinese listed firms' financing structure and corporate governance, empirically analyses the impact of Chinese listed firms' financing structure on corporate governance. The further development of the capital market would help to optimize the financing structure and improve corporate governance as well as increase the efficiency of capital market resource allocation.There are always certain market environmental backgrounds for companies to choose corporate financing structure and means of financing. With specific economic and financial market environment, together with different levels of protection provided to external investors, especially small investors, by Corporate Laws and Merchant Laws in different countries, each country has its own financing patterns and ownership structure and thus its specific corporate governance pattern. This paper adopted a methodology combined theoretical and empirical study, systematically demonstrated financing structure theory, compared the corporate financing patterns of U.SA, Germany and Japan in order to provide beneficial references for Chinese firms to choose and to improve their corporate governance level. From the perspective of mechanism, corporate governance included internal and external corporate governance. The essential characteristic of internal governance is the internal institutional arrangement based on property ownership and the governing body is the firm itself. While external governance is the external institutional arrangement based on competition and the governing body is the market system. Although the internal and external corporate governance have their own emphasis, they actually support and complement each other and interact with each other. We can't achieve the optimal effect by emphasizing on any one side alone. After providing micro-theory about financing structure and corporate governance, this paper conducted an empirical study on the impact of Chinese listed firms' financing structure on corporate governance. This study examines the impact of capital structure on agency costs in 211 non-financial Chinese listed firms for the period 1999-2001. There are two main findings. (1) Firms with high debt to asset ratio have high ratio of annual sales to total assets and high ratio of return-on-equity. If a firm has a high debt to asset ratio, creditors are much more concerned about the payment of interest andrepayment of principal and will have incentives to monitor the firm. Thus, a capital structure with high debt decreases agency costs. (2) Positive and significant correlation is identified between ownership concentration and the return-on-equity ratio. This is because the largest shareholders have a strong interest in firm performance and therefore a high ability to reduce agency costs. Our empirical results further illustrate that firms have inclination of refinancing through stock market and harm small shareholders' interest.At the concluding part, this paper suggested that the stable development of capital market is the important external governance mechanism that guarantees the creation and cultivation of a thriving investment environment, optimal company financing structure and corporate governance. Also attention needs to be paid to enforce internal governance to increase the effici...