Stock Market Financing Frictions And Capital Structure: Model, Simulation And Empirical Studies

This paper studies how financing frictions affect the choice of financial structure and firm's adjustment behavior to the optimal financial structure. This paper first presents a model and then through comparative static analysis studied the factors which would affect the choice of optimal capital structure. I also provide an empirical analysis to test the model presented. In fact, the adjustment behavior provides more evidence on the effect financing frictions have on the choice of the optimal capital structure, so I use computer stimulation to generate the time-series data of how firms get to their optimal capital structure. Based on the data I constructed a model on the adjustment speed to optimal capital structure and tested it using the data from China's listed companies. The results are as follows:First, in the dynamic model, because a firm's future cash flows are affected by their financing policies, when a firm is facing the frictions, its value would change. The firm's value would decrease because of the uncertainty of financing in the next period. The lower the probability of financing is, the more destroy of value.Second, the numerical solution of the model suggests that equity financing frictions is one of the factors affecting the choice of optimal capital structure. The more equity financing frictions are, the lower optimal capital structure is. The empirical results also suggest that the frictions of SEO have significant effects on firms're-financing behavior and their choice of optimal capital structure.Third, the computer stimulation results suggest that the change of equity financing frictions is a significant factor of firms'adjusting speed to their optimal capital structure. The more the frictions are, the lower the adjusting speed is.Fourth, through the empirical tests of the financing frictions of China's capital market, I found that when firms are adjusting to their optimal capital structure, the upper speed is faster than the lower speed. This suggests that financing frictions are more severe in stock market than through banking systems.