Research On The Relationship Between Managerial Entrenchment,Capital Structure And Enterprise Performance

Chinese enterprise have some serious deficiencies in governance, for instance, the board of directors and stockholders’meeting of some listed companies do not have corresponding powers that results in deficiency of governance and control, the control power of managers are not limited, financial decisions are not made considering the achievement of maximal interests of the company but personal preference and interests which jeopardizes scientific and reasonable decision-making, and finally the inefficiency of enterprise operation. All the above issues will unveil the characteristics of the managerial entrenchment. The managerial entrenchments issues in Chinese enterprises are complex due to our special institutions. Such complexity shows that most members of the board of directors are controlling stockholders which means the stock rights are highly centralized; the large proportion of state and corporate shares resulting in weak governance and controlling toward managers, and the board of supervisors cannot exercise their powers efficiently. Since the financial crisis in 2008, Chinese economy has been experiencing the restructuring and development. Hence Chinese enterprises have to face the severe challenges that were brought about by the extensive mode of economic growth with low debt level and low profitability. Environment and resource restriction becomes increasingly serious which drives managers to deal with key issues and major contradiction in a defensive manner. The severe and complex issues of managerial entrenchment and environment factors will jeopardize stockholders’interests. Capital structure reflects the rights and obligations of stakeholders which are affected by governance mechanism of the company and then influence the enterprise performance. Therefore, from the view of managerial entrenchment caused by agency theory, information asymmetry theory, and control right theory, this thesis will discuss the valuable theoretical and practical significance of studying the influence of managerial entrenchment on capital structure and performance of enterprises.Upper Echelons Theory holds the opinion that managers will influence the enterprise strategy choice, thus influence the enterprise performance. Capital structure is accumulated by long-term financing. Managers are the decision-makers who decide to choose what kinds of financing. Principal-agent Theory states that interest conflict exists in managers with lower proportion of shares and stockholders. Asymmetric Information theory suggests that managers hold the company’s advantage instead of stockholders. Managers decide the operation mode whose managerial entrenchment behavior will affect the financial strategy making, thus affect enterprise performance. In the study of the influence of managerial entrenchment on capital structure and enterprise performance, the existing documents measured the degree of managerial entrenchment only by human capital characteristics and internal supervision and incentive mechanism, thus studied its influence on capital structure and enterprise performance. However, China is experiencing economic restructuring, the economic environment is becoming more complex and market is more competitive. All those factors will cause managerial entrenchment behavior which thus affects capital structure and enterprise performance. Such field has only been mentioned in some research prospects, but never been further studied. Therefore, managerial entrenchment is divided into managers’qualities, internal governance mechanism and market environment to study its influence on capital structure and enterprise performance in the thesis.According to the above, the thesis emphasizes on three aspects:(1) Considering the manager’s own qualities, internal governance mechanism and marketing environment as three dimensions to measure the degree of managerial entrenchment. Establishing a theoretical analysis framework under which capital structure has the mediation effect on the relationship between managerial entrenchment and enterprise performance. The hypothesis will be proposed according to the relationship among those three variables. (2) Designing empirical studies. Firstly, selecting measured variables that will be defined respectively from related control variables under the theoretical analysis framework, such as independent variables, dependent variables and intervening variables. Selecting 13 index from the three dimensions and 6 elements to build managerial entrenchment measurement and evaluation system which is used to measure the degree of managerial entrenchment. Debt to assets ratio is used to measure capital structure. Considering financial performance and market performance and selecting Tobin-Q to measure the enterprise performance. Secondly, three groups of regression model based on theoretical analysis frame will be established for follow-up empirical analyses. Lastly, study samples will be chosen. According to data between 2009 and 2013, take 2119 companies that have got listed in Shenzhen and Shanghai within five years as samples among which 1882 listed companies and 10117 groups of data are selected. Moreover, some data related to financial, corporate governance and microeconomics will be selected from the GTA Database and Wind Database. (3) Studying the relationship among managerial entrenchment, capital structure and enterprise performance through empirical analysis. To star with, a descriptive statistical analysis will be used to observe the distribution as a whole. Second, a correlation analysis is use to analyses all variables of managerial entrenchment, capital structure, and enterprise performance. Third, a regression analysis will be employed to testify the influence of managerial entrenchment on capital structure and enterprise performance, and the influence of capital structure on enterprise performance. The last part of this chapter is the discussion about the intervening role of capital structure by using step-by-step regression analysis before which to make quantitative assignment to the element layer of managerial entrenchment by using principal component analysis, after which to measure the mediating effect of capital structure on the relation between three different measurement dimensions and enterprise performance. Such dimensions are the features of managers, internal governance mechanism, and market environment.Through empirical analysis, four major conclusions are drawn in the thesis:(1) Managerial entrenchment has a negative effect on capital structure. Managers’own qualities, internal governance mechanism and market environment will influence the degree of managerial entrenchment. High degree of managerial entrenchment will lower company’s debt ratio. (2) Managerial entrenchment has a negative effect on enterprise performance. Managers’ own qualities, internal governance mechanism and market environment will influence the degree of managerial entrenchment. High degree of managerial entrenchment will cause worse enterprise performance. (3) Capital structure has a positive effect on enterprise performance. (4) Capital structure serves as an intervening role in the relation between managerial entrenchment and enterprise performance. Capital structure has a full mediation effect on the relationship between managers’own qualities and enterprise performance. Capital structure has a partial mediation effect on the relationship between internal governance mechanism and enterprise performance. Capital structure has a partial mediation effect on the relationship between market environment and enterprise performance.The innovation of the thesis embodies as the following aspects:Take the influence factors of managerial entrenchment as the starting point. The measurement dimensions of managerial entrenchment are divided into managers’own qualities, internal governance mechanism, and market environment according to influence factors in managers, internal and external of company. Selecting managers’ personal factors such as age, gender, education background and selecting factors that can reflect managers’working experience and background as the measured variables of managers’characteristics dimension. Selecting factors like proportion of shares and salary that can reflect company’s incentive mechanism, and factors like board size, duty distribution of chairman of the board and the general manager, proportion of,independent directors and job changing cost that can reflect company’s supervision and control mechanism as the measured variables of internal governance mechanism dimension. Selecting macroeconomic climate index that reflects macroeconomic turbulence and selecting excess main business income margin that reflects market competition as the measured variables of market environment dimension. The thesis selected 13 index from 6 elements and 13 indexes to measure the degree of managerial entrenchment. Considering managers’personal factors and working background, the influence of supervision and incentive mechanism on managers, economic restructuring and competitive market, the thesis will have a further and comprehensive study on managerial entrenchment behavior and its influence on capital structure and enterprise performance.Considering capital structure as an intervening variable to build a theoretical framework and research mode which is used to analyze that managerial entrenchment affects capital structure, thus affects enterprise performance. Principal component analysis should be adopted to build F-model which is used to quantify the measure elements before the mediation effect of capital structure is testified. Then, select main factors to qualify the three dimensions of managerial entrenchment through factor analysis. It will testify the mediation effect of capital structure on the relationship between measurement dimensions of managerial entrenchment and enterprise performance. It provides a new direction for the study of indirect acting factors of enterprise performance.