Analysis Of Captial Structure Determinants For Pre-IPO Companies

Capital structure is an important decision in corporate finance, and alsoan important topic in academic research. There have been quite a lot ofresearches about capital structure, but it still remains a puzzle. There arethree directions for capital structure researches: capital structure theories,the economic effects of capital structure, and the determinants of capitalstructure. Empirical research based on public companies is the most widelyused approach for capital structure determinants studies. This research is acontinuation and extension of existing studies. The main contributions ofthis research include:1. Most of the existing literatures are based on public companies. Thisresearch is also based on public companies, but before they were listed.Therefore it is an effective complement to existing literatures.2. Private equity is prospering rapidly in China in recent years, and ithas become an important source of equity financing for private companies. This research will investigate the effect of private equity on capital structure.3. This research also provides a comparison between the determinantsof capital structures for Pre-IPO companies and public companies. It willconnect the conclusion of this research to other existing literatures.The main conclusions this research finds through theoretical analysisand empirical study include:1. The capital structure of Pre-IPO companies can’t be very wellexplained with trade-off theory, agency cost theory and asymmetricinformation theory. However, it can be well explained by the pecking ordertheory, especially when Pre-IPO companies prefer internal fund to financeits projects.2. The capital structure of Pre-IPO companies does not have significantrelationships with the company’s stage of development, size and growth, butit has significant negative relationship with profitability and solvency.3. The adjustment of capital structure is not cost free, and therefore thecapital structure of companies is in sub-optimal status, rather than optimalstatus. However, the cost of Pre-IPO companies is lower than that of publiccompanies.4. The capital structure of Pre-IPO companies is significantly affectedby the participation of private equity. Companies with private equity has higher debt ratio statistically. However, the effect is not very significantwhen other possible determinants are controlled.5. The debt ratio is not significantly different for Pre-IPO companiesand public companies, however, their determinants are not exactly the same.The company size is a significant determinant of capital structure for publiccompanies, but not for Pre-IPO companies. Moreover, trade-off theory,agency cost theory and asymmetric information theory have betterapplication for public companies.This research starts at capital structure theories, and then applies thetheories to Chinese Pre-IPO companies. The conclusions drawn fromtheoretical analysis are further validated with empirical studies based oncompanies of chemical industry. The arrangement of this research is asfollowing:Chapter one is the introduction. It includes the background and purpose,framework and methodology, and innovations of this research.Chapter two is the literature review of capital structure research inChina. It first summarizes the directions and methodologies of capitalstructure research, and then describes the capital structure characteristics inChina compared with western countries. Finally, some typical capitalstructure determinants research works are discussed. Chapter three is the literature review of capital structure theories. It willdiscuss the classical MM theory and some modern theories includingtrade-off theory, agency cost theory, asymmetric information theory andpecking order theory. These theories provide the foundation of analysis inthis research.Chapter four is the theoretical analysis of capital structure determinantsfor Pre-IPO companies. It identifies possible determinants and makeshypothesis base on the theories discussed in Chapter three.Chapter five is the empirical study of capital structure determinants forPre-IPO companies. It includes three parts. The first part builds a capitalstructure model with the determinants discussed in chapter four using thestepwise regression method; the second part deeply investigate the effect ofprivate equity on capital structure; and the third part is a comparison of thecapital structure determinants for Pre-IPO companies and public companies.Chapter six is the conclusion and future work.