China 's Listed Companies Capital Structure Decision - Making And Large - Scale Investment Projects

Capital structure theory can be divided into the following three categories, the Trade-off Theory, the Market Timing Theory and the Pecking Order Theory, depending on whether the firms highly consider the target capital structure and what factors have influenced over the capital structure strategy. In terms of the characteristics of financing structure and market environment of Chinese listed companies, each theory seems to be reasonable.Firstly, additional issuance and allotment of shares still have to get through the administrative investigation and approval of China Securities Regulatory Commission. Although the buildup of corporate bond markets has accelerated in recent years, it still lags behind the main developed countries. Firms have to offer high level of collaterals in order to obtain loans from banks who favor the state-owned listed corporations. According to the Dynamic Trade-off Theory, capital structure adjustment of Chinese listed corporations has high institutional cost. Only if the benefits outweigh the costs of adjustment, the corporations would rectify the deviation of actual capital structure from target via external financing.Secondly, due to the long term existence of "three highs" in the secondary stock market and the increasing numbers of firms refinancing through additional issuances, the funding-raising policies in China should have adhered to the expectations under the Market Timing Theory, tending to issue the equities when the stock prices are overvalued.Finally, owing to the inclination of over investment among the public companies, which makes internal financing can’t satisfy the demands for the projects, financing policies should be highly correlated with the shortfall in accordance with the expectations under the Pecking Order Theory.This thesis tries to verify the effectiveness of the three theories by studying the funding policies and capital structure adjustments of Chinese listed companies based on the large investment projects. The large scale projects are usually involved with huge financial deficits,’sunk cost’of structural adjustment and the’announcement day effect’ when disclosing, that is the reason why I choose the large scale projects to prove the effectiveness of three simultaneously. Meanwhile, the large investment projects in China are only disclosed in the interim report, making the availability of data a problem.This thesis references the methodology of Whited (2006) and Dudley (2012) for the definition and identification of investment year and large investment projects. The empirical results show that two factors, target capital structure and capital structure adjustment costs, play the important roles in capital structure strategies, which conforms to the prediction of Dynamic Trade-off Theory. But at the same time, the empirical results are also basically consistent with Market Timing Theory, which means that capital structure of the listed corporations is the comprehensive result of influencing factors captured by different theories. And the results prove again the standpoint that "|No currently available model appears capable of simultaneously accounting for the stylized facts."(Frank and Goyal,2007; Huang and Ritter,2009).Besides the validation of the prediction of the Dynamic Trade-off Theory, the thesis also focuses on the main factors influencing the target capital structures of Chinese listed corporations. The results show that three factors, the size of assets, the ability of growth and the tangibility of assets, have the critical influences on the setting of target capital structures. The larger size of assets, the higher proportion of tangible assets and the more obscure ability of growth, the higher the target capital structure will be. It reflects that such kind of firms depend heavily on debt financing. The research also shows that a corporation’s profitability is negatively correlated with capital structure without sufficient external financing while positively with enough fund. The negatively correlation indicates that the corporations with stronger profitability get approval of additional issuance and allotment of shares more easily. The positively correlation makes clear that the listed corporations pay high attention to the tax-shield effects and governance effects of debts.In addition to the research of the capital structure adjustment behaviors, the thesis focus another topic in depth, the real effect of capital structure on investment, to provide the empirical support for the reform of administrative approval system. On account of the conflict between shareholders and creditors leading to the inadequacy of asset substitution, contingent governance of debt constraining excessive investment, the analysis on the size of the large investment projects and the ratio of debts can judge how the capital structures impact the investment behaviors. The thesis also classifies large investment projects into high risk and low risk ones, testifying the influencing direction of shareholder-debtor conflict and debt’s governance effect with different risk levels. The results show that debt financing constitutes as a constraint of large investment, the less risk of project, the tighter of regulation. What’s more, state-owned enterprises would like to loosen the constraints of debt on high risky projects under the’grabbing hand’effect, being more prone to operate the excessive investments relative to the private enterprises.