A Study On The Effects Of Debt Financing On Corporate Governance Of Listed Companies

During China's transition from a planned to a market economy, businesses rely primarily on bank loans for capital needs, and only an insignificant part is financed through the capital market. Debt financing has in fact become one of the most important sources of capital for Chinese businesses. However, studies on governance effect of debt financing remain out of proportion as compared with studies surrounding equity financing. The recent years have seen an increasing interest among Chinese scholars in the correlation between capital structure and corporate governance of listed companies, but most of the attention is focused on equity investment rather than on creditor's interests and roles in corporate governance. A statistics shows that the average debt ratio of Chinese businesses is far above 50%, representing that creditors are providing more assets and are consequently undertaking larger operating risks than shareholders. On the other hand, creditor's interests are facing constant infringement by shareholders and management, which is not expected to change unless adequate attention is given to the creditor's role in corporate governance.This study applies various microeconomic theories, including the contract theory, corporate governance theory, stakeholder theory, and capital structure theory, and uses the normative analysis, empirical analysis, contract analysis and comparative analysis in an attempt to study systematically the effects of debt financing on corporate governance along the methodology of "theory, status quo analysis and solutions". The dissertation falls into nine chapters. The first two chapters provide an introduction and a literature review. Chapters 3,4, 5, 6, 7 and 8 discuss from six perspectives the effects of debt financing on corporate governance, including financing structure and corporate governance, the impact of debts on operating performance, contingent transfer and arrangement of control, constraint effect of debts on inefficient investment, involvement of large creditors in corporate governance under debt financing and the reasons of the debt soft constraint and policy suggestions. Chapter 9 is a summary of the previous six chapters. This study is divided into three parts, its logical relations are: the first part (chapter 1, 2 and 3) constructs the framework of the research, obtains three governance effects of debt financing through theoretical analysis. Using normative and empirical analysis methods, the second part (from chapter 3 to 6) discusses from incentive and restraint, signal transmission and control transfer, revealing that debt financing really failing to play in the corporate governance in our country. On the basis of the previous chapters and from the stakeholders theory and our country's debt financing present situation, the third part (chapter 7 and 8) proposes the realistic way of large creditors involved in company governance, analyzes the reasons of the debt soft constraints, and gives the policy suggestions and countermeasure about how to protect the creditor's interests and enhance their role in corporate governance. The full text defers to the "theory basis - realities - conclusions and suggestions" research route.A number of conclusions have been drawn from the study: debts have no positive impact on company's overall performance; transfer of creditor control should follow the contingency principle; debt financing has basically no constraint effect on investment and increase of debts should not be used as a means to curb excessive investment; and involvement of large creditor banks in corporate governance is a realistic option to bring into full play the role of creditors.The major contributions of the study are fourfold: (1) It studies systematically the correlation between debt financing and corporate governance at both the system and non-system levels to explain the gap between western financing theory and China's realities; (2) It breaks away from the simple correlation analysis of debts and investment size, and uses the bank loan ratio and total assets/liabilities ratio as independent variables to perform a linear and non-linear regression against investment efficiency to get the optimal debt ratio; (3) It goes beyond the limitations of profit maximization theory and shareholder value maximization theory and studies the protection of creditor's interests by extending the business objective to stakeholder value maximization; and (4) It comes up with the conclusion that investment size can not be controlled through increase of debts because debts have no constraint effect on investment.