A Study On Institutional Environment And The Governance Effects Of Debt Financing

Debt financing is an important part of the company’s financing structure, whichalso plays a critical role in company’s corporate governance. Most empirical studieshave shown that debt financing has a positive effect on corporate governance inwestern countries; however, there are many differences between western developedcountries’ background and china’s after all. Does the debt financing can still serveto strengthen the effect of corporate governance, in the transition of the Chineseeconomic system? Domestic scholars have conducted a wide variety of research anddiscussion, lots of empirical results show that the governance of debt financing in ourcountry was weakened. There are some research found the institutional environmenthas an important influence on the debt financing, and the related research is analyzethe question from a certain perspective of the environment, and ignore the existeddifferences between the different ownership and different regions. Therefore, thisarticle starts from the economic realities, combining the overall analysis of the fullsample and sub-regional, sub-ownership analysis to find out the relationship betweeninstitutional environment and the corporate governance effect of debt financing. Fromthis point, the research has certain effect to enrich the related study of our country andto provide targeted reference for the development of relevant policies.Firstly, this article analyzes the debt financing’s positive effect on corporategovernance with capital structure theory and corporate governance theory, andsummarizes the prerequisite of debt financing’s effect on corporate governance.Subsequently combined with the status quo of China’s institutional environment, thearticle discusses how the institutional environment influences the debt financing’seffect on corporate governance. Secondly, on the basis of theoretical analysis, thearticle put forward the hypotheses on the relationship between debt financing andcorporate governance effect relationship and the relationship between institutionalenvironment and the debt financing’s effect on corporate governance, meanwhilebuilds corresponding econometric models through theoretical analysis. Thirdly, thearticle using the market index to measure the institutional environment, and selectinglisted companies from2003to2008as samples to made an empirical test on theabove theoretical hypothesis. The empirical research not only makes overall analysison samples, but also makes and sub-samples analysis by dividing the sample intostate-controlled companies, non-state-controlled companies, and dividing the sample into eastern region, central region and western region. Finally, according theconclusions of the study, the article put forward policy recommendations to improvethe debt financing’s positive effect on corporate governance from the institutionalenvironment.The empirical results of this article about relationship between debt financingand the performance of listed companies show that debt financing has a moresignificant role in the suppression of major shareholder’s “tunnel effect”, but itcannot constraint the management agency costs effectively. In general, debt financinghas a negative impact on firm performance. The empirical results of this article aboutrelationship between institutional environment and debt financing’s effect oncorporate governance show that, from the perspective of the full sample, theinstitutional environment and debt financing’s effect on corporate governance has asignificant positive correlation, which mean, the better the institutional environmentin the region, the stronger debt financing’s effect on corporate governance; thesample under different ownership, different parts of the classification of the empiricalresults show that With the acceleration of the market process, with the reduction ofgovernment intervention, with the raising level of financial development, With theimprovement of the level of the rule of law, the differences of debt financing’s effecton corporate governance between state-controlled companies and non-state-controlledcompanies will be gradually reduced. Differences in three regions would also begradually reduced.