Market Competition, EVA Appraisal And Dynamic Adjustment Of Capital Structure

The choice of capital structure has become one of the most important decisions of enterprise. Rational capital structure helps enterprises not only to reduce the cost of capital, but also continuously create value, thus achieving sustainable development. However in recent years our country state-owned enterprise has been criticized for paying inadequate attention to the optimization of capital structure, especially for excessive debt and equity financing preference. In this regard, the Economic Value Added Performance Appraisal started to fully implemented among central enterprises since 2010, as required by the State-owned Assets Supervision Administration Commission (S AS AC).The EVA Performance Appraisal, was a kind of value creation oriented performance appraisal system, aimed at leading enterprises to reduce capital occupancy reasonably, to optimize capital structure, and to boost the corporate value. The local SASAC also began the EVA Performance Appraisal in subordinate enterprises sequentially. In 2013, the SASAC raised the EVA assessment index weight to 50%, which indicated that EVA had played a more important role in the central SOEs performance appraisal. In 2014, the SASAC further explicitly requested reasonable arrangement of capital structure via EVA appraisal. As the core idea of the incentive system, EVA has two common bases associated with capital structure, that is, the cost of capital and enterprise value. So, does EVA Appraisal influence enterprise’s capital structure as expected? Furthermore, if the influence do exist, are the influence differs due to different external environment?In this thesis, the 2192 research samples are from 274 state-owned listed companies of year 2007 to year 2014. Based on trade-off theory, optimal contract theory and beyond property rights theory, the author explores the influence of EVA appraisal on dynamic adjustment of the capital structure and whether the influence will be different under different product market competition. First of all, on the basis of the factors of capital structure explored by previous research, this thesis builds a target capital structure estimation model. Secondly, adds EVA dummy variable into the partial adjustment model, and explores the effects of EVA appraisal on capital structure adjustment speed. Finally, the sample is divided into two groups according to the market competition, further to explore whether the influence of the EVA appraisal on capital structure adjustment speed differs under different market competitive environment.This study shows that, as an exogenous institutional arrangement, EVA appraisal speeds up the dynamic adjustment of corporate capital structure. A further research indicates that the market competition environment is related to the impact on capital structure, that is, the effect of EVA on the speed of capital structure adjustment is more significant in higher-competition industries. Besides, profitability, the company size, non-debt tax shields, free cash flow and industry do affect capital structure of SOEs.According to the above conclusions, this thesis assesses the effect of EVA appraisal, offers recommendations for the implementation of EVA appraisal system and the optimization of capital structure, aiming to promote correct decision of enterprises.The innovation of this thesis lies in:Firstly, based on the special institutional background of the SASAC implementing EVA in SOEs, this thesis establishes an framework to analysis the effect of EVA on the dynamic adjustment of capital structure; Secondly, domestic and foreign research focus on the company characteristics, industry characteristics or macro environment to explore the dynamic adjustment of capital structure, while very few literature study from the angle of the combination of company internal and external governance, which would reflect capital structure of the state-owned enterprise more comprehensively. Thirdly, originated from foreign countries, EVA was introduced into China in recent years. While most foreign enterprises implement EVA for a self-need aspect, the Chinese EVA appraisal implement is under the unified requirements of SASAC, representatives of owners, a special institutional background which couldn’t be observed in foreign countries. Thus, to some extent, this research can examine the effect of a policy implementation, reflecting whether the EVA appraisal has achieved the goal of policy makers in terms of capital structure.There are still some inadequacies axe in the observation of the EVA implementation and the estimation of adjust speed, with the gradual deepening of EVA implementation, developing of information network, and improvement of measurement method, we will definitely overcome these problems in future studies.