The Puzzle Of Capital Structure Of Listed Companies In China: A Systemic Explanation

There is a famous question in the field of capital structure researches, which is thecapital structure puzzle, whose core is analyzing formative factors of capital structure.West researchers have contributed much to this puzzle, and domestic researches havemade some progress, but the shortage lying in these researches is not systemic enough.The purpose of this dissertation is to systemically analyze the capital structure puzzle ofChinese-listed companies. Using the panel data of209Chinese-listed companies in1994～2004, this dissertation deeply analyses the following issues for the purpose, therelationship between capital structure and company value, the forming route of capitalstructure, the internal formative factors of capital structure, the dynamic adjustment ofcapital structure and the environmental restriction of capital structure, furthermore thisdissertation discusses industrial differences about these issues.The beginning of capital structure puzzle is the irrelative proposition of MM theorem,so clarifying relationships between capital structure and company value is the first aim ofthis dissertation. Involved researches didn’t analyzed this issue based on MM theorem, sothis paper defines the capital structure and company value form the theorem, and expandsGranger causality test model to panel data. Based on the Granger causality test principles,it has been found the relationships between capital structure and company value as fellow.Captial structures of Chinese-listed companies don’t have significant ralationship withcompany values, on the contrary company values significantly affects capital structure,which shows company values determines unilaterally capial structures. As for theindustries in detail, there are various appearances for this relativity, the capital structuresand company values in manufacturing, commerce and synthetically industries havedistinctly bidirectional relationships, and the company values in realty determinesunilaterally the capial structures.There are two mainstreams theories in resolving the capital structure puzzle, statictradeoff and pecking order which focus on the forming route of capital structure. Theresearches previously adopting factor analysis and financial deficit didn’t enoughdistinguish the difference of the two theories, so this paper introduces the framework of asset growth, and proves that capital structure of Chinese-listed companies adoptsanti-pecking order financing route for the first time. That is to say, when choosingfinancing approaches, equity priorities debt, and earnings priorities debt; when choosingdebt, long-term debt priorities short-term debt. As for the differences within industries,except the listed companies in utilities and realty which have nearly same preference inchoosing long-term debt and short-term debt, and the companies in utilities according withthe static tradeoff theory, the companies in other industries accord with anti-pecking ordertheory, that is first equity, then debt, and then earnings, and long-term debt prior toshort-term debt.The former two theories don’t include enough determinant factors in resolving thecapital structure puzzle, so that’s necessary to check the internal forming factors of capitalstructure. Domestic researches weren’t identically in choosing determinant factors ofcapital structure, and this paper analyzes the issue based on the effects of the friction ofcapital market on capital cost. This dissertation classifies the friction of capital market intothree parts: tax, agent cost and information cost, and the following conclusions can beendrawn. Tax and information cost have significant impact on capital structure ofChinese-listed companies, while the effects of agent cost isn’t significant. The factors oftax, profitability, business risk, size and age determine the total debt, and the factors of tax,profitability, business risk and age determine the short-time debt. The determinant factorsamong industries significantly show industries’ characteristics.The dynamic adjustment is important part of capital structure puzzle, so it is neededto analyze the realistic capital structures how to adjust towards optimum capital structures.The former researches ignored differences of internal adjustment, and this paper uses thepartial adjustment model and concludes the following results. NDTS, profitability, businessrisk, tangible assets and size determine optimum capital structures of listed companies. For thelisted companies in different industries, there are different determinant factors due to thedifferent industries’ characteristics. As a whole, the adjust costs of capital structure are stillhigh based on inner comparison, total debt rate just adjusts10percent towards optimumdebt rate, and short-term debt just adjusts20percent towards optimum debt rate, whilelong-term debt half adjusts towards optimum debt rate. There are distinctly differences inadjustment paces between short-term and long-term target debt rats among industries, and the adjustment paces are inconsistent within industries.Analyzing effects of financing environment on capital structures is needed forresolving the puzzle. The former concerned researches just covered some part of financingenvironment, and this dissertation offers a whole framework about the effects of financingenvironment on capital structures. This paper finds that financing environment affectscapital structure by changing capital costs, and offers a total hypothesis that debt rate ofcompany is positively relative to loose degree of financing environment, it includes thefollowing hypotheses. At first, debt rate of company is positively relative to the perfectdegree of corporation governance. As for interior governance institutions, debt rates oflisted companies are positively relative to whether director is CEO or not, independentdirectors rate, investment bank directors rate, national stock rate, corporation stock rateand incentive plan, and negatively relative to amount of directors and public stock rate. Asto exterior governance, debt rates of listed companies are positively relative to whethercompany is the takeover target or not, whether company has anti-takeover arrangement ornot and the replacing frequency of CEO, and negatively relative to incumbency time ofCEO. Then debt rate of company is negatively relative to the stinging degree of industrycompetition. In detail, debt rates of listed companies are positively relative to themonopoly level of market, return rate of the industry and industry policies, and negativelyrelative to intangible asset of the industry. Otherwise, debt rates of listed companies arepositively relative to the perfect degree of finance market, business prosperity and thematurity degree of law regulation. Even conservation or openness in culture does haveeffect on debt rates of listed companies.