The Debt Financing And Capital Structure Choice After Rights Offering

Due to the China's unique institutional settings, China's listed companies have strong desire for refinancing, especially the rights offering because of the lower cost of equity financing. However, companies in China have "money encirclement" motivation in rights offering, which lead to their performance drop dramatically. This paper shows that, for these companies, right offering is not the end of "money encirclement", and they keep increasing loans after that. From the perspective of capital structure theory, the paper investigates the financing choice of China's listed companies after rights offering, and finds that varying financing motivation causes different financial result and leverage. The empirical result indicates the change of capital structure is determined by scale of capital, profitability, tangibility, growth capability and free cash flow.The paper demonstrates that the classical theory of capital structure, such as "Pecking order hypothesis" and "Static trade-off hypothesis", cannot account for this refinancing phenomenon in China's capital market. The direct reason is the "Money maximization" and "Empire building" motivation of listed companies in China.Our investigation indicates that the "money encirclement" behavior existing in listed companies has different forms: (1) the firms with debt increasing have no target debt ratio, their objective is "money maximization" and "Empire building", (2) the firms with stable debt ratios have target debt ratio and consideration for further development, thus rights offering pave the way for their further equity financing, (3) the firms with debt decreasing prefer low cost and secure financing tunnel, however, their motivations for refinancing are keep slack capital to repay parent companies and management.