The Research On The Effect Of Debt Financing On Performance Of Corporate Governance

This paper studies the impact of debt financing on corporate governance. Overall, the impact can be divided into two parts. On one hand, debt financing can be used to avoid tax and reduce agency costs of equity financing. On the other hand, debt financing bring enormous bankruptcy costs and agency costs. This paper constructs mathematical model and have found the optimal debt financing should satisfy the margin tax of debt financing plus the margin agency costs of equity financing reducing by debt financing equals the margin agency costs and the margin bankruptcy costs of debt financing. Bounded by the optimal debt financing, debt's impacts on corporate governance can be divided into two phases. On the first stage, debt plays a positive role in corporate governance. Once the debt exceeds the optimal debt financing, debt has a negative effect on it.Based on the above model, it does empirical analysis on listed companies in China, selecting ROE to represent performance of corporate governance and asset-liability ratio to represent the level of debt financing. It examines the data (1990-2009) of listed companies in China and arrives at the result that the debt financing level of those listed companies is now on the first stage. Finally, it proposes some advices on government policies:(ⅰ) Optimal ownership structure, and build a reasonable stock market return mechanism. (ⅱ) Innovate bonds varieties, and encourage using convertible bonds for financing.(ⅲ) Reform issuance program of enterprise bonds to develop the bond market. (ⅳ) Strengthen stock investors'risk awareness, and expand investment channel. (ⅴ) Continue to implement examination system, and strengthen the supervision of allotment and add-issuance of shares. (ⅵ) Establish a manager market, and increase equity incentive to the managers. (ⅶ) Establish good credit environment, and rebuilt relationship between banks and enterprises.