Capital Structure Signaling Thory Study From The Perspective Of Game Theory

Since the publish of MM’s Capital cost Corporate Finance and Investment Theory, countless authors concentrated on the capital structure theory. In the 1970s, many economics used new analysis instruments, such as Information Economy, Game theory, Agency theory etc, to study capital structure.S.A. Ross(1977) studied the capital structure theory from a fresh perspective the asymmetric information, and created the Capital Structure Signaling Model. Because of asymmetric information, the enterprise manager possess more information of the projects than outside investors, such as the anticipated yielding rate and risk distribution of the project. The investors can perceive the business only from the signal of manager’s decision about capital structure and financing methods. The managers will use these signal to transmit information to outsiders, highlighted the well performance of business, the abundant development opportunities, and the huge expected profit of the project.High quality companies tend to increase leverage ratio,signaled that profits of the project is huge, and the future liquidity will enormously increased. However, the low quality business can not imitate it for the bankruptcy cost. The higher the leverage ratio, the bigger probability of bankruptcy. So the outside investors can regard the capital structure as the quality signal of business. They can reach this conclusion that the higher leverage ratio, the better the business performance. The market value positively correlated with the leverage ratio.Our article select Chinese listed public sector companies and real estate industry companies as sample.The study period is 12 seasons from 2011 to 2013. We study the relationship between capital structure and abnormal return, from the view of Ross’s capital structure signaling theory. Our method is generalized method of moments (GMM).Our conclusion as follow:In the monopolized industry, their abnormal return is positively correlated with capital structure. However, in the more competitive industry, their abnormal return is negatively correlated with capital structure.This article adopt game theory method to study capital signaling effect, considering the MM theory, the Bankruptcy Cost theory, the Trade-Off theory, the Agency Cost theory. The different competitive intensity causes different bankruptcy cost. The bankruptcy cost in competitive industry is higher than monopolized industry. Managers and investors will consider the bankruptcy when make investing decision. This article studies capital signaling effect under asymmetric information with modern method and instrument. The conclusion is meaningful to every side in the market.