An Empirical Study On The Relationship Between Debt Financing And Firm Performance Of Chinese Listed Companies

Corporation value maximization is the question shareholders most concern about, and the factors that determine corporation value maximization are closely related to the performance of company. There are many factors affecting company performance, one of which is the capital structure. So the enterprise must ascertain an optimal capital structure to maximize its market value, and in order to make the capital structure optimal it must ascertain the size of debt financing reasonably. Institutional arrangements and economical environment directly and indirectly affect the financial behavior and capital structure of listed company. The financing system of enterprise has gone through three stages, the first stage was the single financing system of finance oriented in the Planned Command Economy, the production and operating activities of enterprise were finished under the uniform domination of our country; the second stage was the financing system of bank oriented in the planned commercial economy, during which enterprises became the strongest main financing bodies after government granted power to them and allowed them to keep a bigger share of profits; the third stage was that it turned into diversity financing mode and financing bodies at the behest of social market economy system and modern enterprise system. Though the capital market of china has stepped into a newly development period nowadays, the gap between matured sophisticated and effective market and ours still exists, so there are many questions worthy exploring in capital market and listed company. Owing to the unbalanced development of security market in our country, the stock market developed better than bond market, which made our listed companies present obvious Equity Financing Preference. It showed that the functions of debt financing were not be realized by listed companies in our country, especially the corporate governance effect, on the contrary, it was only the forced choice when the equity financing cannot be attained, or a method of support to corporation supplied by the government. From the present financial situations we can see governance mechanism of creditors has not been established and improved yet in actual practice. In fact, debt financing plays an important part in the corporate governance, which can restrict and supervise the managers'behaviors one of which is overinvestment. So debt financing has always been an important financial decision for corporation, and some problems about governance effect and the rate of debt financing have also been what the financial scholars explore all the time, especially the focus widely concerned by the academia.The scholars in the field of traditional financial theory,Principal-Agent Theory and information economy did a lot of research on tax-free and financial leverage effect,reducing financing cost,improving the situation of corporate governance and so on, which are bought home to us very strongly. As a financing mode, it can improve the operational performance of listed companies in our country from the following aspects:(1).Debt financing can restrain the phenomenon of insider control to a certain extent; (2).Bond financing will not transfer a wrong signal to investors for the market value of corporations distorted by the noise information; (3).The free borrowing behavior between bank and enterprise can realize the transfer of control rights through the effective bankruptcy mechanism when the enterprise subjects to insolvency, it also avoids the inefficient disposition of resource actually; (4).Debt financing can be regarded as a Motivate Mechanism mitigating the conflict between stockholders and operators, too. In our country the listed companies prefer Equity Financing to debt financing of which the functions were ignored, and the companies of good performance wouldn't like to increase the rate of debt to boost the proceeds of financial leverage and strengthen corporate governance, companies of bad performance can only rely on debt financing, both of the cases led to exacerbation of financial leverage and corporate governance, the creditors suffered grievous losses. In this case, are the trade off theory,Pecking Order Theory and motivation theory included in the financing structure theory applicable to the listed companies in china? Are the factors deciding the financing structure of Chinese listed companies similar to that of listed companies of mature market economy countries? With a view to answering these questions, research on the strategies about debt financing of listed companies in our country has great reference value. Especially for our country which overly emphasizes equity financing, it is more significant in theory and practice to research how the debt financing affects corporate performance, how to realize the optimal size of debt financing and whether the signal effect and financial leverage effect exist.This article will describe the relation between debt financing and firm performance of listed companies in China from the following five parts. The first part is the introduction, including the purpose and significance of research,institutional background and empirical research methods. The second part is the literature review, mainly including the related status of theoretical and empirical research at home and abroad. The third part is the source of theories about the relationship between debt financing and firm performance, including the MM theory,the modified MM theory,Miller model,agency cost theory,Pecking Order Theory and signal effect. The fourth part is about the empirical research on the relationship of the debt financing and firm performance, which is even the most important part. This passage will use the data of listed companies from 2007 to 2009 for research. Firstly I will make a preliminary descriptive statistical analysis of the rate of debt financing of the latest three years, and show the relationship of debt financing and firm performance with pictures to illustrate the present situation. Then I will try to do some empirical research from four aspects. (1).Take DFA as the index instead of debt financing, and Tobin's Q as the index instead of firm performance, the empirical result indicates that the firm performance presents a negative correlation with the rate of debt financing; (2).Divide the ratio of debt financing into three ranges to ascertain a proper size of debt financing. This passage demonstrates that the optimum range of debt financing ratio should be [10%,20%]; (3).This passage will discuss whether the signal effect exists, and finally comes to a conclusion that firms of good performance prefers to debt financing when the rate of debt financing is [10%,20%]. (4).This passage will analyze the financial leverage effect which is about the relationship of DFA and ROE on behalf of the index of financial performance. The empirical result indicates that ROE presents a positive correlation with DFA, and indicates that financial leverage effect should exist independently and not be affected by the effect of debt governance and firm performance. Then the passage will analyze the empirical conclusions according to the above research of four aspects. The fifth part is the advice about the measures related to optimizing the size of debt financing and fully making the debt governance effect yield well.Throughout the structure of the article, the passage mainly studies the relationship of the rate of debt financing of listed companies and firm performance during this present period, and makes a specific analysis of it on that basis. The rate of debt financing will be divided into three intervals for the purpose of comparative analysis, then define the best appropriate interval of debt financing for listed companies. Even the increase of debt financing rate restrains the growth of firm performance, there is still an interval of debt financing ratio in which the firm performance presents a positive correlation with the rate of debt financing. Besides, this passage will distinguish firm performance from financial performance and prove that that financial leverage effect should exist independently and not be affected by debt governance and firm performance. But there are still some shortcomings and difficulties. Firstly, the passage only selects the data of listed companies in 2007—2009 for empirical research, the conclusions may be restricted by the sample observations and period and can't fully reflect the variation trend of debt financing ratio and the relationship between debt financing ratio and firm performance, so the final conclusion will be affected. Secondly, I don't distinguish the different effects caused by the areas and trades when I make a descriptive statistical analysis of DFA, which can be reflected through firm performance. Finally, this passage regards all the debts homogeneous and doesn't make differences in time limit,type and distribution of debts, so the different mechanisms of the different debts on firm performance are ignored. In the subsequent study, researchers can study the problem of debt financing through building a dynamic model, because the company reflects its value by adjusting the level of debt financing ratio, now available research all assumed that the capital structure is stationary. With the development and improvement of the bond market in our country, we can proof-test the hypothesis of information asymmetry by incremental method, and it is also a problem worthy exploring that companies transmit messages to market by the behavior of single debt financing with the signal model.