| After a dozen of years' development, the variety and number of investment in Chinese security market has been substantially increased, with the emergence of new operating areas, one of which is trust financing. Starting from 1996, trust financing reached its peak in 2001, followed by years of gradual decrease. The shortcoming of trust financing has caught the attention of the society ever since. This paper aims to explain the frequent occurance of trust financing after 2001, which deceases the value of the company , from the perspective of agency problems .The body of this paper is composed of six parts. The first part is the introduction which includes a brief introduction of the development of trust financing. The fluctuation of Chinese stock market has made trust ffinancing a high-risk investment, which most probably decreases the value of the company. By doing this, we put forward the theme: what were the factors that have led to the popularity of trust financing among Chinese listed companies despite of its high risk. We try to answer this question by introducing agency theory. This part also introduces the content of this paper.The second part defines the concept of trust financing, as well as describes its current situation and its effet on company value. On a broad sense, trust financing refers to the behavior that one person (party ) ask another person(party) to take care of certain property, similar to asset management. Trust financing mentioned in this paper is a very Chinese way of asset management in which the company entrusts asset management companies or security management companies to invest its property (very often cash) directly in stocks or bonds. As we mentioned before, the size of trust financing reached its peak in 2001, and decreased afterwards. This may be a combination effect of various problems besides the depression of market. Problems of trust financing itself are: the trustor tend to ignore the qualification of their trustees; terms of profitguarantee which are commonly stated in a trust financing contract are not protected by current economic law; trust financing behavior is not fully revealed in the reports of listed companies. All of these make trust financing a high -risk investment. Furthermore, by modelling analysis, we proved that trust financing would lead to value depreciation of a company.The third part of this paper is literature review. Trust financing has been discussed from different perspective of view, such as its motivation, performance, regulation insights, etc. however, most of these discussions are limited to qualitive analysis and are not likely to provide us a profound understanding of trust financing.Meanwhile, since the particular trust financing discussed in this paper is a really Chinese phenomenon, there is no revelant foreign literature. Nevertheless, there are some indirect previous research that may contribute to our study, such as the research about financing perferance and reallocation of collected public money. Different from previous research, this paper tries to explain trust financing with agency theory. Generally, there are three main trust-agency relations in a listed company: that between shareholders and managers; that between large shareholder and other shareholders; that between shareholders and creditors. When managers whose interest is different from those of shareholders are in charge of the management, it would result in agency problems, in the form of free cash flow problem, investment decision problems and other problems, which go against the interest of shareholders. Share concentration has become a problem in most countries in the world, especially in some emerging markets. Over-concentration of shares may lead to expropriation of large shareholders to other shareholders. On the other hand, the existence of debt may reduce agency problem and protect the interest of all investors .The fourth part develops hypothesis and describes variables and data. By literature review, we find that: A . the more cash flow a company has, the more likely that it is involved in trust financing; B. the possibility of trust financing first decreases then increases as the share proportion of large shareholder increase; C. the debt-trust financing relation is negative; D. the better the company at its main business, the less likely that it adopts trust financing as a way of investment; E. leverage level shows a positive relation with trust financing. Based on these hypothesis, this paper runs alinear regression, in which the dependent is the natural logarithm of the amount of trust financing, and the independents are cash flow rate, share proportion of large shareholder, debt ratio, ROA and rate of financing for the previous two years. We got 159 samples from the non-finance A stocks which have announced trust financing between 2000 and 2003, exclusive of those with incomplete data or ST/PT stocks. The samples show that most of them belong to traditional industries such as manufacturing transportation and retaining .The fifth part describes the model, conducts linear regression and analy zes the results. The results of linear regression show that:A. By controlling other variables, cash flow rate is negative to the size of trust financing, while debt ratio is negative to it. The relation of share proportion of large shareholder and the size of trust financing varies. When the share proportion of large shareholder is below 39%, the size of trust financing is negative to it, when it is above 39%, the size of trust financing is positive to it.B. When considering the effect of numerios variables, we found that the effect of cash flow on trust financing is no longer apparent, while share proportion of large shareholder and debt ratio maintain their effect. We may also find from the results that ROA has no apparent influence on trust financing, while rate of financing in the previous two years and company size are positive to it.Part VI reaches conclusion, points out the weakness of this paper and provides suggestions. The results of the analysis indicate that in companies which are involved in trust financing, the main agency problem remains between large shareholder and other shareholders, rather than between shareholders and managers, or between shareholders and creditors. This suggests that when the share proportion of large shareholder in a certain range, the large shareholder is very likely to expropriate the interest of other shareholders, and the existence of creditors may reduce such expropriation, thus increases the value of a company. The results also show that the source of trust financing is not so called free cash, but more probable a disguise of public collected money. Finally, this paper provides some suggestion based on the findings.The research of this paper is based on the current available samples, yetas we all know, the Chinese capital market is far from developed, and trust financing is a temporary phenomenon, these may have negative influence on our findings. With the development of Chinese capital market and the study of other investment behavior, we will surely gain a more profound understanding of what 's going on and what to do, thus improve the value of company by proper investments. |
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