An Empirical Research On The Effect Of Liquidity On Adjustment Speed Of Firm's Capital Structure

Stock liquidity and company's capital structure are two hot issues in the Finance Research study. The current number of the empirical literatures studying factors affecting capital structure are voluminous, yet most scholars in the study regarded the actual capital structure as explanatory variables, and the firm characteristics factors as explanatory variables in their series of studies. However, capital structure theory is not actually used to explain the observed differences among the capital structure, but to explain the differences among the optimal capital structure in the company, that is the differences among the target capital structure. So, the study of the capital structure has evolved into two aspects:first, the target capital structure choices and their impact factors issues; Second, when the company's real capital structure is not its goal of the case, how to adjust its actual capital structure via internal and external business environmental factors to achieve the optimal status, that is, capital structure adjustment and their impact factors issues. On the other hand, the company's stock liquidity affects the costs of equity capital, So this is bound to affect the company's capital structure decisions. This paper argues that the higher the liquidity of the company's stock, the less costs of the enterprises issuing equity and repurchase interests, and thus the adjustment costs of capital structure adjustment faced by the company are much less, making it greater likelihood for the adjustment earnings exceeded the adjustment costs, the faster adjustments can get. However, compared to the well-developed capital markets in foreign countries, China's capital market has a late start, less development, which has led to the domestic determinants of capital structure researches hardly involving important features of the capital market environment characteristics such as Stock Liquidity and so on. This paper will be based on China's listed companies' stock exchange trading data, combined with the dynamic adjustment model of the capital structure, and from the time-varying market frictions perspective to investigate the affects of from the company's stock liquidity dynamic adjustment to the capital structures, with a view to provides some experience basis to supply and improve the capital structure of the dynamic theory.In this paper, only studied the A shares listed companies in Shanghai and Shenzhen from the year 1998 to 2009, through the high-frequency trading data to study the impacts from the liquidity of the stock dynamics to capital structure adjustment speed. In the study, using the relative effective spread to measure the stock liquidity, with the Nerlove partial adjustment model to show the empirical results are the higher the stock liquidity, the faster capital structure get adjusted, as an alternative explanation, the introduction of variable size cannot eliminate the impact of stock liquidity; compared with the upward results, adjustment of the stock of liquidity is in the leveraged downward stronger role in the process.Finally, to summarize the study results of the paper, combined with our current stock market situation, propose some policy recommendations for the development of China's stock markets, and also hoping that this article can provide some help for the company's financing decisions.