A Study On The Determinants Of Capital Structure Choice In Chinese Listed Companies Based On Strategic View

Capital structure has been a hot topic in financial research since Modigliani and Miller created MM capital structure theory in 1958. However, for a long period of time, studies on capital structure have followed the traditional research methods in financial economics. Few researchers have paid attention to the relationship between corporate strategy and capital structure, and tried to establish a connection between financial theory and strategic theory. Therefore, it is still practically a difficulty for a company to make a choice between debt and equity financing. It is still largely unknown about which factors have an impact on the capital structure decision. Many of the actual financing decisions made in a company could not be reasonably explained yet by the classical financial theory.Since 1980's, integration of strategic management and financial theory has begun to attract the attention of some researchers. From a corporate strategy perspective, we established a basic framework of capital structure research. Further, We has done a theoretical analysis and empirical research on the relationship between the strategic factors and capital structure. The strategic factors of capital structure decisions include:external environment, strategic resources, corporate diversification strategies.Based on our analysis of the literature information, we illustrated the intrinsic relationships between the agency theory, transaction cost theory, industrial organization theory, strategic management theory and optimal corporate capital structure in the present report. By employing the strategic management research paradigm, we proposed a capital structure theory based upon strategic perspectives and established a basic framework of capital structure research. We think that capital structure is the result of managerial choice. Further, that choice is based on the incentives and goals of management as complemented or constrained by both external environments and internal resources. The choice of a specific capital structure reflects a company's objectives and its corporate strategy. As an important component of the corporate strategy, capital structure decision should support a company's overall strategy and serve its strategic objectives.According to the framework of capital structure research based on corporate strategy perspective, we analyzed the external environment of an enterprise and summarized its characteristics to reveal the relationship between the external environment and the capital structure of a company. As a result, a decision model for selecting a capital structure based upon external environment was developed taking into consideration both decision-making flexibility and innovative investment.Through the analysis of the data from non-financial companies listed in Shenzhen and Shanghai, we found that there are obvious mismatches between external environment and capital structure for the listed companies in China. For example, the companies in an industry with more dynamic environment and higher competition used higher debt ratio and short debt ratio; however, those in the industry with more stable environment and lower competition tend to adopt lower debt ratio.Based on resource-based view, we analyzed the characteristics of strategic resources, and found that asset specificity is an important feature of strategic resources. Based on this finding as well as transaction cost economics, we established a capital structure decision-making model of asset specificity with external environment as an important factor. In addition, we illustrated the inter-relationship between the strategic decision-making and capital structure decision-making based on asset specificity of strategic resources. Then we used the data of listed companies in China and carried empirical analysis. The analysis showed that the asset specificity measured by the ratio of operating expenses and the ratio of intangible assets has a positive correlation with the capital structure. The debt ratio increases with increasing competition intensity and extent of asset specificity.Through our theoretical analysis of the relationships between the diversification strategy and capital structure from three aspects-risk diversification, transaction costs and agency costs, and our empirical analysis of the research samples from the listed companies in China, it was found that corporate diversification strategies, in general, have significant impact on capital structure. In addition, debt ratio was shown to have a significant positive correlation with the degree of diversification. Further, singled companies have the lowest debt level, unrelated companies have the highest debt level, and related and dominant companies are somewhere in between. These results support the predictions based on the transaction cost economics and the theory of risk diversification, rejecting the hypothesis of agency theory.In order to make up for the potential deficiency of a single equation test, and to increase the reliability of the conclusions of the study, we also developed a simultaneous equations model accounting for potential interaction between the external environment, the characteristics of specific assets of strategic resources, the corporate diversification strategies and capital structure, and conducted an empirical analysis. The study results showed that there is an interaction between capital structure and asset specificity measured by the ratio of operating expenses intensity. The diversified operation of a company enhances its debt financing capacity. On the other hand, the capital structure also affects the choice of a diversification strategy. In short, there is a bilateral between capital structure and the extent of operating diversification.Based on these results from both theoretical and empirical analyses, we propose to optimize the capital structure considering both internal and external environments of a company. Microeconomically, the selection of a company's capital structure should consider how it will match the external environment and internal resources of the company and how it can support and co-ordinate the implementation of the company's diversification strategy in order to obtain competitive advantage. Macroeconomically, the relevant authorities of our country should strengthen the system building and structural reform in order to create a good financial management environment, such as optimizing the equity refinancing policy, reforming state-owned financial system, vigorously developing corporate bond market.The research of capital structure from strategy perspective is still in its infancy in our country. This study attempted to provide some new theoretical research directions and a new research framework. Practically, this study may also provide some guidance and decision-making reference with regards to how to integrate financing decision-making and strategic management in order to gain a competitive edge, and to achieve a good performance for Chinese enterprises.