Risk And The Choice Of The Capital Structure

The Capital structure theory is always a central issue in the field of Finance. The foreign academics have explored the formation of the best capital structure substantially, however, from different aspects, the results are not entirely consistent. This paper studies the capital structure from the aspect of risk. Firstly, this paper introduces the content and characteristics of the risk, analyzes the balanced relationship between risks and benefits, building a theoretical framework for the capital structure. Then, by using the mathematical method, this paper determines the functional relationship between the risks borne by the shareholders under the two situations with liabilities and without liabilities for the same enterprise. And the risk born by the shareholders are divided into the operating risk and debt- decision-making risk. By studying the relationship between the capital structure and debt- decision-making risk, this paper discover that : the more debts an enterprise has, the larger is the debt- decision-making risk, and the debt- decision-making risk increases marginally every year. When the risk of the enterprise is approximately determined with decided cash flows, the capital structure is decided by operating risk. The lower the operating risk is , the higher level of debt could an enterprise own. an enterprise could only own a lower level of debts contrarily. The operating risk is affected by the competition of the industry and the characteristic of the enterprise, thus both of them influence the capital structure of the enterprise. the paper validates that , the capital structures are significantly different among the different industries through empirical study. Then, using linear regression analysis , the model how the characteristic of an enterprise influence the choices of the capital structure is developed. Lastly , the paper proposes several recommendations to optimize the capital structure of an enterprise.This paper shows that: (1) capital structure affects the level of risk borne by shareholders, and would ultimately affects the returns of the shareholders. (2) under a balanced situation between the risks and benefits, the capital structure is decided by operating risk, and The operating risk is affected by the competition of the industry and the characteristic of the enterprise.(3) the capital structures are significantly different among the different industries. The size of the enterprise, the proportion of the tangible assets, the proportion of state-owned shares, the square of the proportion of state-owned shares, free cash flow and the asset-liability ratio etc. would influence the capital structure significantly .