The Role Of Business Risk In Determining Capital Structure Of Listed Companies

Capital structure decision is a basic consideration of corporate financial management. Capital structure determines the cost of capital, influences cash flow and firm value, and has profound effects on various aspects of corporate operations. In this article, the author puts forward the idea that the total risk of a firm consists of business risk and financial risk, and contends that in order to maximize firm value while controlling total risk, a rational firm should balance its business risk against its financial risk. In a mature capital market where rational firms constitute the majority, business risk should be inversely related to debt ratio. This article presents a brand-new definition of business risk, reconsiders capital structure decision from the new perspective of risk balancing, and performs empirical analysis with the data of Chinese listed companies.Based on a newly defined conceptual framework of business risk, this article first analyses the influence of different components of business risk on capital structure. After a thorough analysis of related empirical models, the author builds an indicator system of business risk consisting of three factors:corporate life cycle, product market competition, and earnings robustness. The multiple regression analysis uses the data of listed companies in the year 2007 and 2009, and tests the capital allocation efficiency of our nation's capital market including growth enterprise market, small and medium enterprise board, and main board.The result indicates that the financial behavior of listed companies is becoming more and more rational, but the institutional qualifications of seasoned equity offerings on earnings, together with an underdeveloped debt market, have a negative influence on the financial behavior of listed companies.