A Empirical Research On Free Cash Flow And Capital Structure Adjustment Speed

Since the MM theory has been proposed, the study of the capital structure has became more sophisticated, Scholars study it from the impacting factors of capital structure and capital structure adjustment speed. Recent studies have mainly concentrated to the capital structure adjustment speed, from internal and external point of view to study the impact of its capital structure adjustment speed. It has made great significance to the conclusions. We know the factors that affect the capital structure adjustment speed can be summarized as random factors and capital structure adjustment costs. Capital structure adjustment costs, however, is difficult to quantify. Studies have not yet offered a more rationally unanimous conclusion, so study of it will have a major significance.Fauldender and Smith (2007), consider that the size of the free cash flow is closely related to changement in the capital structure, changement in the capital structure is largely constrained by the adjustment costs, so free cash flow can be as a measure of the size of the adjustment costs scale. His designing ideas will be used in this article.8001samples of the Shanghai、Shenzhen listed companies using, First, free cash flow will be used as the stratification criteria, the total sample is divided into high, medium and low three sub-samples, and then do each of its return, coming to the capital structure adjustment speed, compared to adjusting the speed of each sample group size, in order to study free cash flow and capital adjustment speed relationship. To test robustness of these relationships in a specific internal environment in this article, from the board features board size, the number of independent directors, two vocational situation. sample is stratified firstly, and then using the cash flow, samples are stratified on again, further testing the robustness of the relationship, but also examines the relationship between the speed of adjustment and the board characteristics.The empirical study found that higher free cash flow of the company to adjust its capital structure is faster than moderate free cash flow of the company, capital structure adjustment speed of the lower free cash flow of the company is greater than moderate free cash flow of the company, that this assumption is the assuming one and two, but assumption three, low free cash flow of the company to adjust its capital structure faster than the higher free cash flow of the company, can only be partially validated. In this paper, the robustness test, whether in that case the board characteristics, the paper with the assumption one and two that can be tested.while three assumption is partially to be tested. Above conclusions is that free cash flow can be used as a cost metric, so free cash flow and capital structure adjustment speed are closely linked.