A Study On Capital Structure And Company Performance Of The Listed Companies In Chinese Real Estate Industry

This paper studies the relationship between the capital structure and corporate performance of listed companies in real estate industry in China. Real estate industry is an important industry in the national economy.In 2003, the State Council issued a document, which established real estate industry as a pillar industry in the national economy. After six years'development, real estate's contribution and impact on the national economy grew a lot, coupled with its characteristics of strong industry correlation, involving more than 50 industries, which including construction, steel, cement and other building materials industry, as well as credit, insurance and other financial services industry. The real estate industry will promote development of related industries as well as the development of the whole national economy. The impact of real estate on the national economy is also reflected in the demand driven. The current real estate investment has become an important support to expand the demand for investment, effectively stimulating the growth of the national economy. Chinese real estate industry's financing channels are limited, and corporate prefer to debt finance, so their assets-liability ratio is relatively high. The main sources of funds are bank loans, and the proportion of short-term borrowing is greater than long-term liabilities. With real estate market competed increasingly and regulatory efforts have been increased, real estate development enterprise fund chains become increasingly tense, and once the capital chain rupture,which would lead to market risks and serious affection in the development of related industries. Real estate development enterprises present such a predicament, and the relationship between ownership structure and performance is not yet clear. This is the purpose and significance of this study.Capital structure refers to the business value and the ratio of various types of capital composition. Western capital structure began in the 20th century 50 years. In 1952,the United States financial management scientist David·Durand (D. Durand) summarized the main points of capital structure at the time the as three basic theory:net profit theory, operating profit trade-off theory and the traditional theory of capital structure, which are known as the early theory. The fundamental view of net profit theory is that as the company increased debt, increased financial leverage can increase the total value of the company. Operating profit theoretical assumed that when enterprise debt ratio increases, the debt tax shield benefits brought about by increased liabilities of just being caused by the cost of equity capital, offset by an increase, the total value of the company remain unchanged. The conclusions of the traditional theory are as follows:each company has an optimal capital structure through the use of financial leverage to reduce their weighted average cost of capital, thereby increasing the total value of the company.Performance is that enterprise achieves business objectives or performance levels through the rational allocation of inside and outside those resources effectively. It is also the company's operating, such as financial results, capital preservation and appreciation. Performance measurement includes a single indicator and multiple indicator method. ROE, Tobin's Q value, EVA, ROI, sales returns, the rate and the net profit margin are commonly used indicators in single law. At present the multiple indicator approaches contain in terms of main-level analysis and balanced scorecard. Analytical Hierarchy Process (AHP) is a multi-objective decision-making rules and processes theory, which created by a United States mathematician TLSant. It can address the need for taking into account the volume and non-quantitative nature of complex rules under the conditions of the problem.There are many theoretical studies on the relationship between capital structure and corporate performance, but the domestic academic achievements studied with characteristics of the real estate industry are less. Given the accumulation of knowledge and research capacity are limited, this research is only made a meaningful attempt. Looking at domestic and international research on relations between capital structure and corporate performance status, there were two different findings. Namely:capital structure and corporate performance are related and they are negatively relative. This may be due to use of the sample, indicators, models. This paper take China's real estate A-share listed companies as samples, excluding a new listing or delisting of incomplete data of companies in 2005-2007 to do research and analysis. In building a multi-linear model, capital structure chose a representative asset-liability ratio as explanatory variables, while the business performance chose ROE and Tobin's Q as the explanatory variables from a financial and market angles. Taking into account the owners shares structure, asset size, growth and other factors, this paper model design by adding a state-o the ratio (Statep), the proportion of tradable shares (Tradap), stock concentration (CR10) three independent variables and the asset size (Lnsize), growth (DO) 2 control variable. This paper presents six assumptions:First, the asset-liability ratio was positively correlated with performance; secondly, the proportion of state-owned shares and operating performance have a negative correlation; Third, the proportion of tradable shares and business are not related to performance; Fourth, Ownership Concentration is in positive correlation with performance; Fifth, company size and operating performance are related; Sixth, the company growth and business performance are related. In 2008 the rapid spread of global financial turmoil made China's real estate business decline in performance, so the relationship of business performance and capital structure were not significant, and the model did not consider the return of data into in 2008.Empirical results show that:(A) China's real estate listing company's debt ratio and corporate performance are in a negative correlation. Debt financing has the effect on financial leverage and tax shields, but according to trade-off theory, when the rate of assets and liabilities grows to a certain extent, the higher of liabilities and the lower of the business performance. Coupled with the country's financial policy tightening, the in borrowing costs increase, making high debt not conducive to the improvement of corporate performance. Our country's real estate asset-liability ratio of listed companies on average is nearly 60%, far higher than the average level of listed companies. From the empirical results, we may infer that China's real estate asset-liability ratio of listed companies has exceeded optimal capital structure point. (B) China's real estate equity structure of listed companies has a significant impact on business performance. Empirical results have contradictions with assumptions two, three, and studies have shown that the state-owned shares of listed companies have a positive correlation with performance ratio, and the concentration of financial is related to stock market performance,and has negative correlation with the financial performance. The results indicate that present listed real estate companies'too large a proportion is not conducive to the improvement of financial performance, but to some extent to improve the enterprise's market performance. In addition, the conclusions from the evidence available shows that maintaining a certain degree of equity concentration is conducive to company performance. (C) There exists an obvious economies of scale in China's real estate listed companies, The empirical results are consistent with hypothesis 5.The real estate industry is a capital-intensive industry, and company size bigger, the more solid financial strength, the more investment opportunities and investment projects, which benefits the company's operating performance. (D)The relationship between growth rate and performance is not obvious in our country's real estate assets of listed companies. The empirical results can't fully prove hypothesis 6, as during 2005-2007 listed companies' growth rate is very high, high rates of growth must have adequate capital and cash flow as a support, while many countries in recent years issued development of real estate related, especially controlled the sources of financing channels so rapid growth will lead to greater operating and financial risks.Based on above, this paper put forward the following recommendations:(A) Broaden the financing channels. At present, China's reliance on the real estate business for the banks make the commercial banking system bears a disproportionate share of the real estate industry's systemic risk. In order to maintain the healthy development of the real estate industry and effectively prevent financial risks, it is imperative is to increase the financing instruments to broaden the financing channels. (B) Stage equity financing. Stage equity financing is support way to provide cash before entering a mature phase prior to determining the future for real estate companies. Stage financing has the advantage of not increasing the debt ratio, because high degree of acceptability of reporting the information is affected by the debt ratio, with post-loan difficult to obtain. This will not only solve the funding problem, but also optimize the capital structure of enterprises. (C) Optimize the equity structure. Decreasing state-owned shares is a general trend, but for the real estate industry, the involvement of state-owned shares in the macroeconomic policy level, have access more benefits. In the capital market yet to be perfected, we should be paying attention to speed of the premise of state-owned shares. At the same time, maintaining an appropriate stock concentration can increase enterprise's financial performance and market performance. (D) A focus on company's size and growth. Chinese real estate companies should choose a reasonable choice of capital sources combined with the size of its own. Larger companies'capital structure may be with a higher proportion of debt financing. Smaller companies should focus on equity financing. (E) Improving the relevant legal system. We should improve relevant legal systems to optimize the capital structure of the real estate industry to establish a diversified real estate financing mechanism to make the appropriate legal preparations to lay a solid legal basis.The innovation of this paper:firstly, present studies on the relationship between capital structure and corporate performance are a lot, most of which are from the relationship between the capital structure (for example, considered only from the asset-liability ratio) and corporate performance, but this paper studies the relationship between capital structure and corporate performance taken into account the impact of ownership structure; Secondly, previous studies on the measurement of business performance is often from a single point of view, or for corporate financial performance, or for the market performance, but this article on China's analysis of the performance of listed real estate companies is from two angles, using a two more representative indicators (such as ROE and Tobin's Q) to be construed as a separate variable regression analysis; and finally this article is from the real estate industry perspective to research the relationship between capital structure and corporate performance, and research findings and recommendations have a high relevance and practical significance.