Empirical Study On The Interaction Between Capital Structure And Corporate Performance

The research of the relations between the capital structure and corporate performance was started with the theorem by Modisliani and Miller (1985). Western economist put forward a lot of capital structure theory after that from a different way which including the trade-off theory, asymmetric information theory, control theory etc. However, this subject has a unified conclusion after decades of research. On one hand, Jensen (1986) pointed out that:managers may be too much free cash flow free to abuse. Debt enterprises are forced to repay principal and interest rate within the agreed time. Otherwise, the debtor filed for bankruptcy liquidation proceedings. These reduce free cash flow abuse of the manager in the company, thereby reducing agency costs, thus improving company performance. On other hand:according to the pecking order theory suggests that, When the existence of the business financing needs, first select the endogenous financing, followed by debt financing will choose the final choice of equity financing. The high performance of the company can produce more endogenous capital. The need for financing investment in new projects, the use of more internal resources, and external debt less debt ratio is also lower. It can be seen that the capital structure not only affect the company’s performance, corporate performance will also affect the capital structureWith China’s reform and opening up, China’s stock market is rising:there are over1700corporations. The operating condition of company is playing a crucial role in the development of China’s economics. During the restructuring of the enterprise system, they become a pioneer of the reform, and the results achieved by the management decision-making behavior and decision-making are well known to and by the market test.In order to study the Interactive relationship of capital structure and corporate performance in the list companies in China. This paper is divided into six parts and the main content and perspectives are as follows: Part Ⅰ:Introduction. Introduced the background, purpose and significance of this study, and reviewed the meaning of corporate performance and capital structure, the indicators selected.Part Ⅱ:theoretical analysis. From the MM theory, agency theory, incentive theory, asymmetric information theory and management control theory analysis of the impact of capital structure on firm performance. Timing theory, orderly theory and weigh the theoretical analysis of corporate performance on the capital structure.Part Ⅲ:Literature Review. Review the impact of the capital of institutions on corporate performance and the performance impact of capital structurePart Ⅳ:An Empirical Analysis. Firstly, proposed assumptions that capital structure and corporate performance negatively related based on agency theory, negative correlation between corporate performance and capital structure based on the theory of the Pecking Order. Then we illustrate the sample selection and data sources. Thirdly, the explanatory variables and control variables selection. Finally, we analyze the empirical testing methods from a theoretical point of view and clarify the principle of homogeneous and heterogeneous panel unit root test. During this paper introduced panel data Granger causality test ideas and explain the difference GMM estimates (Diff-the GMM) principle of the method.Part Ⅴ:Empirical results and analysis. First to analyze variables describe statistics. Then analyze the panel data granger test results, found that the company’s performance ROE and capital structure LEV Ranger causal relationship. Finally, do the analysis of empirical results and the reasons.Part Ⅵ:Conclusions and inadequate. Put forward the main conclusions of this paper:capital structure can affect the company’s performance, in turn, company performance can affect the capital structure; asset-liability ratio and company performance was the underlying.Innovation of this paper:(1) From the theoretical level, the interaction between capital structure and corporate performance:(2) Using panel data Granger causality test to verify the capital structure and corporate performance on each other;(3) Capital Structure and dynamic panel data model of the interaction of corporate performance, using the Diff-GMM method for calculation.Inadequate in this paper:(1) the research method, the sample period for the one-year span, while in fact the capital structure changes is a dynamic process of change, we only consider the impact of year-end capital structure and corporate performance, it may did not adequately reflect the interaction between changes in relationship(2) In which the selection of corporate performance indicators, taking into account the rate of return on net assets, relatively simple.(3) The selection of indicators of capital structure, consider only the total debt ratio, there is no capital structure refinement.