Research On The Relationship Between Capital Structure And Operating Performance Of China’s Small And Medium-sized Banks

Capital structure can reflect the solvency, corporate governance arrangement and financial costs of an enterprise. A reasonable capital structure helps keep the capital flow in a virtuous cycle and reduce financial risk, and then improve the debt-paying ability and operating performance. As special enterprises, the capital structure of small and medium-sized banks is closely related with operating performance. Small and medium-sized banks are key component of financial system in China, and play an important role in modern economy. Some of them are even regarded as the new emerging forces of future banking industry. With the capital regulatory environment being more and more strict, small and medium-sized banks are confronted with big challenges in risk management ability, capital strength, risk pricing ability and business developing ability. Meanwhile, there are also serious problems of capital structure, such as the relatively single capital structure, high concentration of shareholding, low supplementary capital ratio and high capital adequacy ratio. These problems lead to the reducing of comprehensive competitive power and operating performance. With further push of interest rate capitalization and deposit insurance system, we should bring the capital structure and operating performance into study. The deepening study of relationship between capital structure and operating performance of small and medium-sized banks is good for the optimization of capital structure, the increase of market competitive power and the operating performance. Therefore, further study of the relationship between capital structure and operating performance has become an important task of current financial circle.This paper is based on the analysis of capital structure theory. It selects small and medium-sized banks as the object of study and explores the relationship between capital structure and operating performance. This paper aims to provide theory reference for study of the relationship between capital structure and operating performance and provide theoretical foundation for the optimization of capital structure and operating performance. This paper includes four parts:First part is theoretical analysis. This paper introduces the research background and significance and literature review, makes analysis of capital structure, elaborates relative theory of capital structure, and analyzes the direct and indirect influence of capital structure to operating performance. This part establishes theory basis for the whole paper. Second part is status analysis. According to recent statistics of sample banks, it analyzes the current situation of capital structure of small and medium-sized banks from three aspects, including core capital, supplementary capital and capital adequacy. Then it carries concrete analysis for small and medium-sized banks from four aspects, including profitability, liquidity, security and growth. Through the analysis of current situation, it finds out the problems in capital structure and operating performance of small and medium-sized banks in China.Third part is empirical analysis. This paper selects the statistics of34small and medium-sized banks with sufficient information disclosure from2007to2012, and uses returnonequity (ROE), liquidity ratio (LIQ), non-performing loan ratio (NPR) and total asset growth (TAGR) as the explained variables to measure the profitability, liquidity, security and growth, and the first majority shareholder (H), share proportion of the largest shareholder (CR1), share proportion of the top ten shareholders (CR10), ratio of equity accounts for core capital (EC), ratio of supplementary capital accounts for total capital and capital adequacy ratio as the explaining variables. It also introduces asset size and business cycle as the control variables influencing operating performance. It establishes four panel data models, and makes empirical test of the relationship between capital structure and operating performance. It also makes regression tests for the relationship between capital structure and operating performance of joint-equity commercial banks nationwide and city commercial banks respectively, and finds out the differences between two kinds of banks. The empirical results indicate the capital structure is significantly related with operating performance, meanwhile the relationship between capital structure and operating performance differs between the joint-equity commercial banks nationwide and city commercial banks.Fourth part is the conclusion and policy suggestions. Combining previous theoretical analysis with empirical analysis, it gains four main conclusions. First of all, the core capital and operating performance of small and medium-sized are significantly related. In ownership property aspect, the first majority shareholder being state-owned is not significantly related with operating performance. In equity concentration aspect, the first majority shareholding ratios not significantly related with operating performance, and the top ten majority shareholding ratio is significantly positive related with security of small and medium-sized banks. In core capital structure aspect, ratio of equity accounts for total capital is significantly negative related with security, and positive related with growth. Secondly, the ratio of supplementary capital accounts for total capital is significantly positive related with profitability and liquidity. Thirdly, capital adequacy ratio is significantly negative related with profitability, and positive related with security and growth. Last, small and medium-sized banks have scale effect, at the same time business cycle change affects operating performance. On the basis of Basel Agreement â…¢, this paper uses the successful experience of foreign banks as reference and puts forward policy suggestions of optimizing capital structure and increasing operating performance. The concrete policies includes:first, optimize the core capital structure of small and medium-sized banks; second, increase and optimize the supplementary capital; third, keep the capital adequacy at a reasonable level; fourth, optimize the internal and external environment of small and medium-sized banks.