Research On The Determinants And Dynamic Adjustment Of Capital Structure Of Chinese Listed Firms

Capital structure refers to the composition and proportion of firms’ various sources of funding. The result of firms’ financing through a variety of sources comprises the capital structure. The funding sources of firms include debt, equity and hybrid securities. Capital structure directly determines the overall risk and cost of the capital firms’take advantage of and has a direct impact on the overall value of the company and shareholders’wealth. Thus the source of funding is of great significance for the company. Especially in the aftermath of the financial crisis, with the mutation of countries’economic situation and financial forces, the company’s capital structure decisions are increasingly important.The research on China’s capital structure began in the context of the high debt of state-owned enterprises. In order to reduce the debt ratio of state-owned enterprises, the Chinese government has made an active attempt. For example, the establishment of Shanghai and Shenzhen Stock Exchanges mark the birth of China’s securities markets in1990. With the baptism and experience of over20years, the structures of China’s capital markets continue to improve, and the multi-level market system framework has been basically formed, including the main board, the SME board, the GEM board, the agency share transfer market. Until the end of December2011, the listed companies in China totals2342, with the equity financing of897.243billion yuan. But under the circumstances of imperfect legal system, unsound institutional environment and underdeveloped bond markets, it causes the unclear business ownership relationship, soft budget constraints and soft credit constraints for the enterprise running, and the lack of effective investor protection mechanism. It is seen that the basic corporate finance environment in China is far from a mature market economy environment. This operating environment differences led to the fact that the western capital structure theories cannot be entirely suitable for the actual situation in China. The study shows that with more obvious tendency for equity financing, the listed companies in China excessively pursue the amount of financing driven by the maximization of the benefits, which not only hinders the optimal capital structure, but also affects long-term development of listed companies in China.In this context, it starts from the relevant capital structure theories and research literature and analyzes the main features of capital structure of Chinese listed companies. Using669listed companies issuing A shares in China’s stock markets before2012, with the financial statements denominated in RMB as a sample, it conducts an empirical analysis on the impact factors and dynamic adjustment of the capital structure of listed companies, through static panel and dynamic panel analysis methods respectively. On this basis, it proposes the reasonable objective of financing decisions for listed firms and related policy recommendations to provide a basis for decision making for the practitioners and regulatory authorities, as well as a useful reference for the follow-up study of domestic scholars.It is divided into seven parts and the research contents of each part are as follows.The first chapter is the introduction. It defines the research scope and research methods based on the research background and significance. Finally, it demonstrates the research framework, innovation and shortcomings.The second chapter is relevant theories and literature review. This section starts with the relevant theories of capital structure and comments the literature on the impact factors, the dynamic adjustment of capital structure and the reasonable objective of financing decisions in a more systematic way. It provides the proof for the theories and empirical analysis afterwards.The third chapter is the analysis of the characters of capital structure of Chinese listed firms. It first describes the change trend of capital structure of listed firms in China. On this basis, it carries out a comparison and analysis on the capital structure of listed companies in36countries (regions) and focuses on the reasons of equity financing tendency of listed companies in China.The fourth chapter is the empirical analysis of the determinants of the capital structure of listed companies in China. This chapter begins with the theoretical discussion of impact factors of the capital structure of listed companies. On this basis, it proposes the research assumptions to examine the main impact factors of the capital structure of listed companies in China by means of fixed effects panel methods. Finally, through the empirical test, it further analyzes and determines the constraints of government control and corporate governance factors on other influencing factors.The fifth chapter is the empirical analysis of dynamic adjustment of the capital structure of listed companies in China. This chapter provides an empirical research on the dynamic adjustment of the capital structure of listed companies using the system GMM method. On the basis of the estimated adjustment speed of capital structure of listed companies, it conducts a robustness test on the pecking order theory and the stock price mechanics model, to further analyze and determine the variation features of dynamic adjustment of the capital structure of listed companies in China.The sixth chapter is the objective achievement of financing decisions for Chinese listed companies during the dynamic adjustment of capital structure. This chapter empirically analyzes the dynamic relationship between the capital structure and the goal of financing decisions of Chinese listed companies, on the premise of the definition of the goal of financing decisions from the traditional corporate finance theories. On this basis, it puts forward more reasonable objective of financing decisions and elaborates the rationality and applicability of this goal in China. The above provides an important reference and reasonable basis for the capital structure decision-making and the dynamic management of capital structure.The last chapter is the conclusion and research prospects. It gives the basic conclusions and policy recommendations based on the research results. It subsequently puts forward the research direction for the capital structure of listed firms in China, combined with the shortcomings of the dissertation.Through the theoretical analysis and empirical testing, it reveals the following research conclusions.(1)It gives the following explanation concerning the characteristics of the capital structure of listed companies in China.First, Chinese listed companies focus on the equity financing (37.66%), followed by internal financing (18.20%), commercial credit financing (17.76%), long-term debt financing (14.64%) and short-term debt financing (11.74%). This also fully reflects more obvious equity financing tendency of China’s listed companies.Secondly, it gives the relevant data of debt ratios of non-financial listed companies in36countries (regions) in accordance with the classification of the legal system. Through the international comparisons, the average long-term debt ratio in China is the lowest within36countries (regions). This shows that most of the debt financing of listed companies in China comes from the short-term debt financing. Thirdly, the main reasons of equity financing tendency of listed companies in China include the lower cost of equity financing, the intrinsic motivation for free cash flows of managers and the underdevelopment of bond markets.(2)It gives the following conclusions through the empirical research on the determinants of the capital structure of listed companies in China.First, the firm size, asset tangibility, the industry leverage medium, the proportions of state-owned shares and state-owned legal person shares have a significantly positive relationship with the leverage ratio. The profitability, depreciation ratio, stock return and the percentage of independent directors have a significantly negative relationship with the leverage ratio. The firm growth, the percentage of executive stock ownership and board size are not significant.Secondly, the industry leverage medium has the most significant impact on the leverage ratio, namely, the target leverage ratio has the most significant impact on the capital structure of listed companies in China. But the government regulation and corporate governance factors have a negative impact on the adjustment speed of listed companies, which causes the adjustment speed to decrease.Thirdly, for the higher profitability firms, the internal financing takes priority over debt financing. While for the lower profitability firms, the asset tangibility is a very important factor to determine the amount of debt financing.Fourthly, the much lower executive stock ownership ratios and the imperfect independent director system show that the government should promote the diversified equity and further improve and integrate the mechanism of corporate governance of listed companies in China, in order to establish an effective corporate control market.(3)It gives the following conclusions through the empirical research on the dynamic adjustment of capital structure of listed companies in China.First, the adjustment speed of capital structure of listed companies in China is48.55%, indicating that the listed companies only need a year to make up about half of the gap between the actual leverage ratio and target leverage ratio. The faster adjustment speed shows that the degree of friction of China’s capital markets is not larger than some countries in the west.Secondly, although the high leverage and low leverage firms quickly adjust the gap of current leverage ratio deviated from the target leverage ratio, the adjustment speed of capital structure of the high leverage and low leverage firms is not symmetric. Thus we cannot confirm that the faster adjustment speed of the leverage ratio of China’s listed firms is determined by the mean reversion of the leverage ratio.Thirdly, through the further test of the pecking order theory and stock price mechanics model, the result is more able to confirm that the dynamic adjustment of the capital structure of listed companies in China better supports the trade-off theory. From the impact on the capital structure of listed companies in China, although the pecking order theory provides some information on the changes in the capital structure of listed companies in China, this theory is difficult to explain the dynamic adjustment of the leverage of listed companies. It is seen that the pecking order theory can only be classified as a special case of the generalized trade-off theory.In addition, the test of stock price mechanics model shows that compared with foreign listed companies, the listed companies’ stock price volatility effects on leverage are more short-term, and managers are more proactive to adjust the leverage in China.(4)It gives the following explanations on the objective achievement of financing decisions for Chinese listed companies during the dynamic adjustment of capital structure.Through the empirical research, it shows that the goal of constantly adjusting the leverage ratio of Chinese listed companies is the maximization of shareholders’ benefits. On this basis, from the characteristics of China’s weak efficient capital market, it proposes that "to maximize the value of the company subject to maximizing the stock price (Max V1/Max P1)" and its applicability in the field of corporate finance. The assumption of this goal is that the market has foresight, and it is unbiased. According to the logical reasoning, there are two possibilities for the unbiased capital market. First, the market is not efficient, but has better foresight. Secondly, the market is efficient, but not high efficient. To some extent, the latter would be more reasonable. Surly, the related data and empirical support would be the direction of future research.The innovations of this dissertation are mainly the following two aspects.First, based on the empirical analysis, it conducts a robustness test on the dynamic adjustment of capital structure of listed companies in China using the static panel and dynamic panel analysis methods. It testifies that the trade-off theory can better explain the above phenomenon and from the perspective of the impacts on capital structure, the pecking order theory can only be classified as a special case of the generalized trade-off theory. Meanwhile, on the basis of stock price mechanics theory, it measures the impacts on the leverage of the unexpected variations of stock prices using GMM estimation method, which provides valuable lessons for the dynamic management of the target leverage.Secondly, it starts from the objective of the company’s financing decisions defined by the traditional corporate finance theories. It further confirms more obvious equity financing tendency of listed companies in China by the empirical research on the relationship between the goal of financing decisions and capital structure. On this basis, it puts forward the reasonable objective of financing decisions of listed companies in China (MaxV1/Max P1) under the characters of weak efficient capital markets by logical reasoning and theoretical explanations. Besides, it explores the rationality and applicability of this goal from the assumption constraints of efficient capital markets, information asymmetry and management incentives three aspects.In addition, because of the limited research time and space, there are mainly two shortcomings in this dissertation, which needs continued in-depth study in the future.First, in the empirical study of the determinants of the capital structure of listed companies in China, due to not readily available data, it does not consider the factor impacts on the capital structure such as the costs of capital structure, macroeconomic level and so on.Secondly, it only elaborates and analyzes the reasonableness of the goals of financing decisions from the theoretical level, lacking the empirical analysis and testing on the reasonableness of the financing decision objective.