The Relation Of Liabilities Cover Ratio And Performance Of Chinese Listed Manufacturing Companies

As social economy organizations, making profits is the enterprise's most fundamental goal. Without profits, enterprises will lose the meaning of existence. The profitability of enterprises is how to make performance evaluation. Since 1958 when Modigliani and Miller proposed the MM theory, the people began to realize that the capital structure is an effect factor on the performance. A large number of theoretical and empirical researches had been done on the relation between the capital structure and the performance. But there were not same results on this problem. Some scholars considered that there was a positive linear correlativity between the capital structure and business performance, while the others got the very opposite results. In fact, there was not a precise correlativity between the two factors.The targets used to measure the capital structure are liability/asset ratio (LAR) and Market Leverage, but they are all static indexes and could not explain the formation mechanism of performance reasonably. In this paper we want to develop a new dynamic capital structure index to explain the performance. Taking into account the LAR is a proportion of the assets and liabilities, we made a ratio of the due assets and the due liabilities in the given period and name it as Liabilities Cover Ratio (LCR). Then the LCR will represent a procedural capital structure, which should be more correlative with the performance.In order to measure the relation between the LCR and the performance, we selected 1018 A-share listed companies from CSMAR in 2006-2007. Stock returns were defined as performance variables. The result of regression analysis was that there was a significant linear correlativity between LCR and the performance. The mean and maximum of LCR had positive linear correlativity with the performance, while the standard deviation and minimum of LCR had negative linear correlativity with the performance. The former means that when the due assets could cover the due liabilities, the performance would be better. The latter means that when LCR changes violently, or the due liabilities could not be paid back in time, the performance would deteriorate. On the other hand, this study also measured the relation between LAR and the performance with the aim of comparison between the two models. The regression results showed that there was no obvious linear correlativity between LAR and the performance, which proved that LCR was better than LAR to explain the performance.The main innovation of this thesis was that we defined a new measure of corporate capital structure - LCR. And a linear model was established to explain the relation of LCR and the performance. Future researchers could make further studies conveniently. Based on the data of China's capital markets, the results could be much helpful to Chinese accounting information users, especially the investors. Finally, several proposals on improving the LCR and optimizing the performance were advanced to help the enterprise managers' work.