Study On The Relationship Between Entrepreneurs’ Expectation And Corporate Capital Structure

The captial structure theory is a very complex question in the firm finance theory, andhas been the most important topic since long ago. What determines a firm’s capital structure?Since MM theorem, scholars have never stopped to explore the “puzzle of the capitalstructure”.Unlike many existing studies, this paper studies the capital structure from the aspect ofentrepreneurs’ anticipation. The article constructs a model that contains the expectations forreturn on assets and for risk to explain how a firm’s capital structure forms. In this study, weadopt the model which was first proposed by Chenjianguo and Songtiebo(2002) andChenjianguo(2007), But we made part of modifications on their model. The research idea is,first of all, we discusses the different partialities for profit and risk of shareholders andcreditors in a firm, and points out that the firm’s capital structure decision is made whenshareholders and creditors look for their optimal utilities and make their decisions, if theexpected level of revenue rate and risk of the firm’s properties is fixed and remains unchanged.After research, we proves that the capital structure of a firm mainly depends on four factors:interest rate, the expectation of revenue rate and risk of the firm’s properties, and thelikelihood of bankruptcy. Further, a firm’s capital structure is a decreasing function of therisk-free interest rate, an increasing function of the expectation of revenue rate of the firm’sproperties, a decreasing function of the expectation of risk of the firm’s properites, and adecreasing function of the likelihood of bankruptcy. In order to verify this conclusion, theauthor tests the theoretical model with the data from the first quarter of2002to the thirdquarter of2011. The testing supports the theoretical model.Finally, we make some suggestionsfor how to optimize the firms’ capital structure.