Debt Financing And Corporate Performance

The purpose of this paper is to study the relationship between the financing structure and corporate performance, especially for the real estate industry which has such high debt ratio and bank loans, and then discuss the characteristics of such indebtedness and the correlation between different channels of financing and corporate performance. Thus the paper offers some suggestions for this financing model.The article firstly reviews financing structure theory by David. Durant, MM theory, the agent model, bankruptcy model, equilibrium theory, control theory and signaling theory. After the literature review, this paper describes financing structure of enterprises and financing channels of the real estate industry, and then analyses debt financing and equity financing, as well as their respective governance mechanisms and the impact on corporate performance. Meanwhile the paper discusses about the current situation and causes of real estate companies'financing model from the industry perspective. In the next part, this article verifies the relationship between debt financing and corporate performance of the real estate industry by the empirical research. This paper selects Tobin's Q to measure corporate value and use the method proposed by Professor Bai Chong-en(2005). The debt/asset ratio (DAR) is used as the scale index of financing structure. Meanwhile the study sets operations ratio (pre-receivables) and financing ratio (issuance of bonds and bank loans) to indicate the debt channels. By collecting data of the 81 listed real estate companies from 2005-2008 and using the descriptive statistical analysis and linear regression model, we obtain the following conclusions:1) The relation between DAR and the performance is inverted U-type. The result shows that to a certain extent debt can strengthen corporate governance and improve the performance. But over-high DAR will increase the risk of bankruptcy, leading to the inefficiency of government system; 2) Financing ratio and operating ratio are negatively correlated to Tobin's Q. It indicates both of these activities can't improve the corporate performance.Based on the study in this paper, the article puts forward a number of recommendations. Firstly, the real estate companies have to change the over-reliance on bank loans. Secondly, the industry should expand the financing channels, including trust and securitization. Finally, this paper refers to some well-known companies'new initiatives in financing method which may help the real estate industry in financing model.