Study On The Interaction Between Capital And Corporate Performance

Capital structure theory has always been a hot topic discussed by corporate governance and financial management theorists. Whether capital structure is reasonable or not is directly related to the level of the company cost of capital, which affects the overall value of the company. Since the classical capital structure theory have arised, especially after the emergence of MM theory created in the middle of 20 th century, many western scholars have never stopped the study of capital structure, besides, the mechanism of the capital structure and corporation performance has been discussed a lot. Many scholars put forward their own views in the study of the capital structure theory, and these views also greatly enriched the theory. The measure of corporation performance has been constantly changing from the initial single indicators to multiple indicators. In addition, the measuring standard is changing from simple profit to comprehensive earnings assessment involved in profit, debt repayment, operations, growth and other aspects. Reasonable capital structure have an impact on corporate performance through the way of the cost of capital and corporate governance, while at the same time companies with good performance can gain the favor of shareholders and creditors, thus wining greater initiative in the choice of capital structure. Researchers at home and abroad have studied the question whether there is interaction effect between capital structure and corporate performance, and how they are influenced on each other. They provided many useful methods. However, there is existing a great controversy between the interaction or mechanism of action, and many scholars have come to different conclusions. As a result, it is essential that the research should be distinguished by different country(area), industry and scale, or even enterprise with different stages of development.Software and information service industry is a new industry which is developing rapidly and continually in our country, and it plays an important role in solving the employment problem, increasing national income, maintaining national security, etc. According to statistics, by 2010, there are more than 2000 software and information technology services companies earning more than $100 million in revenue. Besides, the annual growth rate as high as 28.3% is an important driving force for the promotion of national economic growth. By the end of 2012, the number of listed companies in this industry has reached one hundred. Our country suspended IPO almost the whole year of 2013, so it reduced the number of listed companies in the industry to some extent. However, with the rapid development of the industry, there are also a lot of problems, especially the unreasonable capital structure. Libilities mainly are current liabilities, which not only increased the cost of capital, but also kept high repayment pressure. Therefore, it had a negative influence on the corporate performance. Our government is actively seeking a opportunity and method to establish leading enterprises of the industry in order to promote the development of small business, so that the whole industry chain can be fully tapped. To conclude, it became increasingly urgent for us to study the interaction and discuss the mechanism between capital structure and corporate performance, in order that we can identify the factors that hinder the improvement of company performance and promote the rational use of funds, enhancing the company performance.From the perspective of theory, this paper, which was based on the concept of the capital structure and corporate performance as well as interaction mechanism of them, explored the interaction of listed companies’ capital structure and corporate performance using empirical research methods scientifically and reasonably, and put forward some relevant proposals. In order to accomplish the series of tasks, this paper includes the following sections:At first, this paper analyzes the background, namely, why I choose this industry to study. Then it defines the significance and estimates the purpose this paper wants to achieve. And the paper reviews the domestic and foreign literatures and summary in order to use previous research results better. In the final stage of this section, the thinking framework of this paper is enclosed.Secondly, this section gives a review of the development of the capital structure theory and the measurement methods of corporate performance. And then it analyse the mechanism of interaction between capital structure and corporate performance theoretically.Thirdly, this paper carries out a statistical description detailedly on the status of listed companies in software and information service industry according to financial statements, and described the capital structure and some indicators which can represent the corporate performance. The listed companies in this industry have lower capital structure and current liabilities accounted for more than 90% of all the liabilities. As for the company performance, the indicators pointed to the different trends are not the same, even opposite. So a evaluation method which are objective and comprehensive is imperative. Therefore, this paper applied the Principal Component analysis to obtain the comprehensive evaluation of listed companies in software and information service industry. Common factors were chosen among 15 indicators to reflect the companies’ profitability, operating ability, solvency, growth capacity and cash flow ability. These were then used to generate a composite score for each company’s performance.The next section is the empirical content. It focused on the analysis of the interaction of capital structure and corporate performance calculated by the section above. At first, the paper point out the hypothesis in the relationship between the two things. Secondly, the paper introduces control variables, and then built simultaneous equations. Finally, we obtain the regression results by regression analysis with the statistical description.Finally, in the last section, this paper put forward the conclusions and policy recommendations. And that is: the capital structure has a negative impact on the corporate performance, but the corporate performance has a positive impact on capital structure. Based on this conclusion, the paper put forward some proposals to transform the way the capital structure affect corporate performance. Taking various measures to promote that the capital structure’s positive impact can be full put on corporate performance. At the end of the paper, some deficiencies of the study are pointed out.