The Research On The Relationship Between The Degree Of Asset Specificity And Capital Structure

Asset specificity is an important content of the transaction cost economics, andclosely related to the development and growth of enterprises. Investment in SpecificAssets can help companies increase product differentiation and meet customer needsbetter in order to enhance the competitiveness of enterprises, especially in the face offierce competition in the market. But the assets of strong specificity are difficult tochange the application when the environment is changing, resulting low liquidationvalue of the asset. Creditors will raise the interest on the debt, or develop morestringent borrowing conditions for considering their own interests when enterpriseshave strong degree of asset specificity. It increase the enterprises’ debt financing costsand makes enterprises prefer equity financing. So asset specificity impacts on thecapital structure of the enterprise.Since the financial crisis in2008, China has been in the economic downturnperiod. The development of the industry is very sluggish. Market is more competitive.Difficulties for businesses increase significantly. The sales ratio goes down and fundsare occupied by finished products increase. In these crisis years, different degree ofspecific assets exhibit different characteristics. The strong degree of specific assetshas low liquidation value and can bring competitive advantage for enterprises. Theweak degree of specific assets has high value of the collateral can bring limitedcompetitive advantage, so exhibit more nature of universal assets. Therefore in theeconomic downturn period different degree of specific assets have a different impacton corporate capital structure. Enterprises should consider the degree of the specificassets in order to formulate financial decisions in line with their own characteristics.The study sample of the paper is the electronic and communication technologiesA-share listed company of Shanghai and Shenzhen Stock Exchange in2008-2011.This paper analyzes that R&D expenditures and intangible assets are specific assets ofstrong degree, while fixed assets are specific assets of weak degree, and research thestrong and weak degree of specific assets how to affect the capital structure in theeconomic downturn period by multiple regression analysis. In order to better illustratethe problem, this paper chooses machinery, equipment, instrumentation listedcompanies in the sample data as a comparative analysis in2004-2005and2008-2011.Its results show that the strong degree of specific assets is positively correlated withthe capital structure in the economic downturn period. The weak degree of specificassets is positively correlated with the capital structure in economy on departure,while positive correlation in the economic downturn period. Then the paper analyzesin depth that different degree of specific assets how to affect the capital structure inthe economic downturn period through case of LDK.The main contribution of this paper is to distinguish the degree of assetspecificity and empirical research on the relationship between the different degree ofspecific assets and capital structure in different economic background. Previousstudies about the relationship between asset specificity and capital structure stressedthat stronger degree of specific assets. There is little literature analysis of the weakdegree of specific assets and consider the changes in the economic operationbackground. So this paper researches the relationship between the degree of assetspecificity and capital structure in the economic downturn period. It reveals that different degree of specific assets has different effects on the capital structure in theeconomic downturn period.