Short-term Financing Policy And Financial Flexibility

Since Modigliani and Miller (1958) proposed the MM theorem, the cornerstone of the modern capital structure theory. Many researchers have done a lot of researches and analysis on the company's financing structure of Western economics. Research shows that the factors of market environment, macroeconomic conditions, industry characteristics and company characteristics will have a significant impact on the company's financing structure. At the same time, the financing structure will not only affect the company's market value, but also on the company's performance. Studying the financing structure of enterprises is of great significance to the daily operation and value promotion of enterprise.Financial flexibility, the ability to respond to uncertainty in cash flow needs or investment opportunities, is a key consideration in financial policy choice.Mainly from the corporate cash holdings and low debt levels. Financial flexibility is a new direction in the research of capital structure theory. Yet, evidence that the need for financial flexibility impacts long-term financial policies, there is little, if any, evidence on how firms build financial flexibility into short-term financing needs. Specifically, assuming managers try to minimize financing costs, which sources of financing (i.e. cash or debt) are used to meet fluctuations in short term financing needs?One potential reason for the limited research on firms'short-term financial policy choices is the difficulty to empirically identify times when short-term financing needs are high. In this study, In order to solve this problem, this paper uses the research ideas and methods of Douglas (2014) based on seasonal demand for the company's financing decision to study business management for short-term financing needs. In China, there is a seasonal demand for many industries and companies. However, so far there are few on short-term financing decision making in the study of these companies with seasonal demand. Study on these decisions well reveal the company selected in the short-term financing of the financing. In this paper, we will analyze the quarterly data from 2002 to 2014 in the nonfinancial sector by using the methods of normative analysis and empirical analysis. I will summarize the relevant literature, find out the relationship between financial flexibility and short-term financing needs. Empirical analysis, this paper will use a series of non-balanced panel data based on the econometric analysis method, STATA software and Excel software for data processing. For the statistical results, this paper will use a large number of tables, with a view to more profound analysis of the study object.Based on the above methods, the paper is divided into six parts. The first part is the preface, describes the existing research background, significance of the topic of this article. Introduces the research framework and main contents, and describes the research methods and the innovation of this paper. The second part is the overview of the theory of enterprise financing structure. To understand the source of corporate financing costs and the difference lays theoretical foundation for next research. The third part of the thesis is the research status at home and abroad, this article from two aspects respectively, the domestic and foreign literature collation on financial flexibility and financial structure, finding that at this stage of the study only discussed the financial flexibility of capital structure of enterprise value and sustained release of financial constraints on the important role and how to balance the property to maintain financial flexibility when debt and cash holdings problem. Yet, the relationship between corporate short-term financing decisions and financial flexibility is a vacancy. The fourth part describes the design of the empirical model. First introduced the research ideas of this article, discuss two ways of enterprise short-term financing decision from the perspective of financial flexibility, issuing bonds and cash, and then a detailed analysis of the cost of them. Base on this, pointing out three hypotheses. Because of the uncertainty of short-term financing needs, it is difficult to measure short-term financing demand. In this paper, the author firstly determining the seasonal profiles, and the relationship between the seasonal demand and short-term financing needs, determine the regularity of short-term financing needs, finally based on seasonal financing needs of empirical analysis of proposed hypothesis is established to determine the short-term financing for enterprises. At the same time, this chapter explains the origin of the sample and the selection of the data, and introduces the method of seasonal determination in detail. Finally, this paper selected from 2002 to 2592 2014 companies a total of 95420 quarters of data. And after a judge found that 2592 companies have 953 companies with seasonal. For all Sample Firms, the proportion is 36.76%.So this paper by judging the relationship of seasonal, the seasonal demand and short-term financing needs,The sixth part is about conclusion and outlook.According to the above research and empirical research, this paper gets the following conclusions:By identifying seasonal firms and when they face peak demand, I am able to provide evidence on the sources of financing used for short-term needs. My evidence suggests that short debt, such as bank debt and trade credit, is an important source of financing for seasonal firms. Seasonal firms hold higher amounts of private debt than non-seasonal firms. Further, balances of debt and trade credit increase when seasonal financing needs are high and are subsequently reduced when seasonal financing needs are low. These sources of slack are preferred to internal slack such as cash holdings balances, which do not follow a similar pattern. The use of private debt for short-term financing needs is consistent with firms minimizing costs associated with asymmetric information at issuance while avoiding agency costs associated with holding large balances of excess internal funds.The contribution of my paper is three-fold. First, I provide evidence on how seasonal firms fund fluctuations in short-term financing needs, and in doing so, provide insights on the importance of financial flexibility in explaining firms' financing decisions. Notably, my evidence suggests that managers minimize short-term financing costs by relying on debt, especially debt with low issuance costs. This evidence on firm behavior supports arguments in the banking literature that an important role played by banks is the ability to provide firms with financial slack due to low informational asymmetry between firms and private lenders. Second, the results that seasonal firms hold more conservative long-term financial policies in order to use debt for short-term financing needs imply that maintaining financial flexibility in short-term financing impacts overall capital structure choice. These results are consistent with the finding in Denis and McKeon (2012) that future investment needs impact the choice of target leverage ratios. However, my results suggest that firms also consider short-term financing needs,which are often treated separately from long-term financial policies, when setting the overall capital structure policies of the firm. My final contribution is methodological in nature. Using a simple model with data available for most Compustat firms, I identify whether firms face seasonal demand. I further identify when demand for the firm's products peaks. The model provides an intuitive classification of seasonal and non-seasonal firms. While this paper uses seasonal activity to shed light on our current understanding of short-term financial management, the use of this measure might prove valuable in other areas including but not limited to corporate investment, earnings management, and tax management. At a minimum, the measure provides an important variable for future work to control for seasonal fluctuations in financial balances as well as work using quarterly data.However, because of my limited ability and some practical reasons, this paper has two shortcomings:due to the development of market economy in China was later than western countries, thus listed companies survival time is shorter, and listed companies began to published quarterly financial statements of the time interval is limited. So although my sample is selected by all listing Corporation, but there will be a small sample size of the situation, but just because I analysis in seasonal qualitative judgment, so the impact in the controllable range. The second is due to the limited their theoretical level and research means, just features of short-term financing to debt financing and retained cash in the company of season has carried on the empirical analysis, in seasonal research company of short-term financing decision-making and enterprise assets structure and capital structure adjustment and the adjustment of the speed not carried out in-depth research.