The Research On Relationship Between Growth And Debt Financing

Growth is referred to the capability of sustainable development for enterprises and reflects the future management condition, in other words, a discription of enterprise growth state. High-growth enterprises ordinarily appear as owning development in industry and field involved, vast prospect in product, year-by-year expansion in scale and continuous increasment in benefit. The level of growth not only reflects the capability of sustainable development, but also provides valuable reference for enterprise development strategy. Therefore, many stakeholders, such as enterprise managers, investors and so on, pay more attention on growth. Growth is the key of enterprise future value and an important factor of capital structure. Enterprises in higher growth generally obtain more investment opportunities. During their high-speed growth stage, however, heavy losses will be caused to their own and stakeholders if they take no count of capital structure optimization and pursue greater scale and blind expansion. As a result, the study of the relationship between growth and debt financing is beneficial for enterprises to make full use of resources to optimize capital structure and keep a stable growth.Although domestic and foreign theory and empirical study have indicated that growth has an important impact on debt financing, there is no unanimous conclusion on the relationship between growth and debt financing. After empirical study based on agency cost theory, Smith and Watts (1992), Gaver J.J. and Gaver K.M.(1993) and Barclay and Smith (1995) proved that high-growth enterprises are low in debt level so as to alleviate agency problems of asset substitution and underinvestment caused by debt. In addition, agency cost theory holds that short-term debt can effectively reduce agency problems of asset substitution and underinvestment, thus high-growth enterprises tend to use short-term debt to provide low agency cost. The empirical study made by Barclay and Smith (1995), Guedes and Opler (1996) and Aydin (1999) shows that the higher growth enterprises own more short-term debts. Nevertheless, considerring that Chinese domestic capital market is less mature than foreign capital market, the application of agency cost theory in domestic capital market needs to be be further verified. Moreover, since China has special ownership structure and soft budget constraint problems, inhibitory effect of short-term borrowings on asset substitution and underinvestment remains to be further inspection. Based on the fact that China’s long-term debt market is not mature enough, the debt financing of listed companies are short-term debt-based at present. Therefore, it is necessary to study the relationship between growth and source structure of short-term debt. However, the study of the relationship is few and far between at home and abroad. Based on the above, after referencing related theories and empirical research literature, this paper further discusses the relationship between growth and source structure of short-term debt in order to perfect the study on this relationship.Based on describing agency cost theory, signaling theory and strategic corporate finance theory, employing nonfinancial listed companies of Shanghai and Shenzhen A-stock market between the year2001to2010as samples, and using Investment Opportunity Sets (IOS) as the Growth’s substitution variables, this study investigates the relationship between growth and debt financing. Especially, Investment Opportunity Sets (IOS) is calculated by using factor analysis and then extracting main factor according to seven variables. These variables consist of the variance of sales revenue after eliminating the effect of scale (VARSALE), the ratio of depreciation to total assets book value (RTODEP), the ratio of capital expenditures to total assets book value (RACTCE), the ratio of market value to book value of assets (MKTBKASS), the ratio of market value to book value of shareholders’ equity (MKTBKEQ), the ratio of earnings to market value per share (EP) and the ratio of fixed assets to total company market value (FAVR). The empirical results demonstrate that the growth of Chinese listed companies has a significant effect on the debt financing structure. Generally speaking, the growth is observably negatively related to debt level, and is observably negatively correlated with short-term debt, namely high-growth enterprises own low debt level and tend to choose long-term debt to provide stable and sufficient sources of funds. Further analysis indicates that the higher growth enterprises, the higher proportion of commercial credit in the source of short-term debt. On this basis, this paper tests study samples in group using median by the means of IOS. The derived multiple regression results show that the growth is indistinctively negatively related to debt level, observably negatively related to short-term debt and observably positively related to proportion of commercial credit in the source of short-term debt. In addition, this paper takes a sensitive test with the use of enterprise net profit growth rate as the alternative variable of growth, and the empirical results also indicate that the growth is indistinctively negatively related to debt level, observably negatively related to short-term debt and observably positively related to proportion of commercial credit in the source of short-term debt. It can be seen that robust testing results are the same as main testing results. The empirical results show that China should actively develop long-term debt market, reduce the costs of long-term debt financing, and improve relevant laws and regulations of the commercial credit in order to promote the development of the commercial banks and finance leasing business, expand financing channels and ensure stable growth of high-growth enterprises.