Research On The Dynamic Capital Structure Of Companies Based On Financing Constraint

Capital market frictions have long been recognized as an important determinant of corporate decision-making and the valuation of securities.The financing decision of firms is one of the most important topics in the theory of corporate finance.There are many reasons for the occurrence of capital market frictions.For example,firms need to spend costs to find investors in the capital market.Even if they find investors,they may not be able to meet the financing needs of the firm due to other factors.Therefore,according to the reality,it is clearly necessary to consider the impact of capital market frictions such as those mentioned above on corporate financing decisions.Based on on-commitment dynamic capital structure theory,liquidity management theory and real option theory,this paper studies the impact of three different external financing constraints on corporate capital structure and investment decisions.Based on reasonable economic assumptions,this paper establishes the corresponding mathematical model,uses stochastic analysis,dynamic optimization and other methods to solve the problem,and makes a comparative static analysis of the numerical results.The main contributions of this paper include the following aspects:(1)This paper combines the uncertainty and search cost of debt financing with the recent development of dynamic capital structure theory to study the impact of debt financing constraints on the firm’s capital structure and other decisions.In this model,both the EBIT and the debt level of the firm can be dynamically adjusted.To make better use of the tax shield effect of debt,firms can increase their own debt level.If a firm decides to issue debt,it must search for investors in the bond market and pay the corresponding search cost.After the two financing parties met,the firm immediately restructured its debt.The firm first redeemed all current debt,then issued new debt,and determined the distribution of the total surplus of the debt restructuring and the firm’s target leverage ratio.By taking the firm’s reverse leverage ratio as the only state variable in the model,this paper divides the firm’s decision and stakeholder value into three independent intervals for discussion.Due to the existence of search costs,this paper introduces the search threshold based on the previous literature and analyzes the impact of exogenous parameters on the firm’s search decision.This paper also studies the choice of optimal initial leverage ratio and the impact of exogenous factors on the dynamics of corporate financial leverage when the firm conducts debt restructuring.(2)This paper combines the uncertainty and search cost of equity financing with the recently developed liquidity management theory to study the impact of equity financing constraints on the firm’s capital structure and other decisions.In this model,the firm’s capital stock and operating cash flow follow the jump-diffusion process,and the funding sources include retained earnings,equity financing and short-term debt financing.After the short-term debt matures,the firm may choose to roll over the issuance or default on the debt.To reduce the probability of debt default,firms can raise funds in the stock market to reduce their short-term debt levels.If a firm decides to issue shares,it must search for investors in the stock market and pay the corresponding search cost.After the two financing parties met,the firm immediately carried out equity restructuring.The firm needs to decide on the distribution of the total surplus of the equity restructuring and the amount of equity financing of the firm.By taking the firm’s book leverage ratio as the only state variable in the model,this paper divides the firm’s decision and stakeholder value into four independent intervals for discussion.Due to the existence of search costs,this paper introduces the search threshold based on the previous literature and analyzes the impact of exogenous parameters on the firm’s search decision.This paper studies the impact of exogenous factors on the dynamics of corporate leverage,and obtains the analytical solution of the credit spread of corporate short-term debt,which clearly reflects the quantitative relationship between credit spread and book leverage ratio.Finally,the model provides another explanation for the pecking order theory and the low leverage puzzle,that is,in order to avoid the uncertainty and search cost of future equity financing,corporate managers prefer debt financing and maintain a low leverage level.(3)This paper studies the impact of equity financing constraints on corporate investment and financing decisions by combining the classic real option theory with the recently developed theory of dynamic capital structure based on no-commitment.The development of the firm has gone through two different periods.In the start-up period,the firm has no physical capital available for production and only has a growth option.When the demand shock of the market is sufficiently large,the firm chooses to exercise the growth option and finance the exercise expense by issuing equity and debt.The key assumption of the model is that at the moment of investment,the firm is constrained to use all-equity financing,that is,part of the exercise fee must be financed by issuing debt.Since then,the firm has entered a mature period.In the maturity period,the firm engages in production and operation activities and obtains operating cash flow.Firms determine their capital structure by weighing the tax advantages of debt against the costs of bankruptcy.In this paper,we obtain a semi-closed form solution for the optimal investment threshold and the face value of debt issuance,find a monotonic relationship between the optimal investment threshold and the financing constraint parameters,and analyze the impact of exogenous parameters on the firm’s investment decision,financing decision and the credit spread of newly issued debt.