Empirical Research On Capital Structure Based On The Dynamic Adjustment Model

Capital structure - The mix of the various types of debt and equity capital maintained by a firm. The more debt capital a firm has in its capital structure, the more highly leveraged the firm is considered to be. Capital structure affects governance structure and influences the firm value. A better choice of capital structure can increase the firm value, so it's very important to a firm and arguably one of the most significant subjects in the modern finance theory. This paper tries to find out the determinants of capital structure and the relationship between them and capital structure.Chapter Two theoretically analyzes the determinants of capital structure of Chinese-listed companies and concentrates on the factors studied less before.Chapter Three constructs a dynamic adjustment model of capital structure and employs the dynamic panel data methodology to make empirical study of Chinese-listed companies. The estimation results reveal that there is a moderate adjustment costs in dynamic adjustment and the speed to attain the optimal capital structure is fairly quick in China. Besides the leverage the firm already has, profitability, tangibility, inflation and lending rate have remarkable effect on the optimal capital structure.Chapter Four compares two static model of capital structure and the dynamic adjustment model, and supports the theory that the dynamic adjustment model is more accordant with the financing circumstances.Chapter Five conducts an empirical study on the determinants of the speed towards the optimal capital structure. After showing that there is obvious adjustment to the industry mean of capital structure for Chinese-listed companies practically, the paper uses the industry mean of capital structure as the target of adjustment and employs the dynamic adjustment model again and the newest sample of Chinese-listed companies to reveal the factors of the adjustment speed. The findings are that the gap between the firm's actual and its target debt ratios and firm size have remarkable effect on the adjustment speed.