On The Relationship Between Debt Financing & Corporate Governance

At present, one of the most critical problems is the poor-performance corporate governance (abb. C.G.), which will not only affect listing companies' operation but also determine the future development of the whole security market. It is a common difficult problem to be resolved by the scholars, regulatory authority and enterprise decision-makers.Nearly all the vast research documents deal with the framework between shareholders, board of directors (abb. BOD) and managements. They also touch on the relationship between corporate governance in narrow sense and some financial indexes such as Tobin Q, EPS. This is not all the C.G From the point of history development, C.G is a dynamic concept and its implicit implication is changing all the time. Now when we mention C.G, we often refer to the C.G in broad sense instead of narrow sense. In fact, C.G consists of two parts-- internal C.G and external C.G. Only based on the complete concept, may we evaluate the C.G overall level.Debt financing is one of the important aspects of external C.G. Influence on listing companies from debt financing can be attributed to the following aspects. The first influence is on the shareholders, such as limits to the investment decision, the potential takeover of control from owners to debtors and influence on the valuation of investors. The second is on the management. For example, debtors can request the management to decrease investment and consumption; they can also limit the invalid capital allocation, change their loan decision through credit record and exert pressure by bankruptcy. The third is to add some special terms in the contracts in order to safeguard the debtors' rights. The last is reputation incentive mechanism. On the basis of theoretical analysis, quantitative analysis is used in the follow-on research. The results show that the CGI changes with the debt ratio, bank loan, payables, tax and wages payable in the same direction, while with the debt term structure in the opposite direction. Then I introduce the debt-oriented C.G. in Japan which strengthens the external C.G effects.Some suggestions are put forward at the end of the thesis for China's listing companies. Above all, we should improve the corporate shareholders' structure and public information quality. Besides these, the regulatory department should foster a complete and transparent security market. Meanwhile, companies should optimize their capital and debt structure. Bank C.G is also a key element to be improved.