The Research On Effect Of Debt For Equity Swap On Corporate Governance

The state-owned enterprises (SOEs) reform and banking reform are a long-termcore issues in the process of China’s economic transformation. Since the early1980’s,a series of SOEs reforms, characterized by “decentralization of power and transfer ofprofits”, have transferred most of control right over businesss from the government toSOEs and promoted China’s rapid economic development. However, large losses ofSOEs and huge amounts of non-performing loans of bank credits during1998financialcrisis promoted a series of reforms, represented by Debt for Equity Swap (DES), toimplement. In1999, the State Council published the police named opinions on theimplementation of the debt-to-equity program and recommended601companies toDES, including the amount of459.6billion yuan. As an important supporting measurefor the reform of SOEs, DES was greatly concerned by government officer for itseffects of credit resources allocation and corporate governance. This paper, using thesample of1999-2008China A-share listed companies in Shanghai and Shenzhen, studythe effect of debt for equity swap on corporate governance from the theoretical andempirical.This paper begins with an overview of the theory of corporate governance,including agency theory, investment theory, finance theory and incentive theory, forproviding the theoretical basis and analyze ideas in analysis of debt-equity swap forthe later; then based on the three specific fields of the efficiency of investment,financing structure and executive incentive for the analysis and examination of theeffect of debt-equity swap in corporate governance and credit allocation with empiricalevidences, also provides evidence for the path that how debt-equity swap to influencethe corporate governance; finally with the combined measures of the company value(financial indicators and market indicators) to test the combined result of the impactof the debt-equity swap on corporate governance.This paper summarizes the main findings are as follows:(1) DES of excessiveextent of under-investment and investment are lower than the non DES companies thatinvest in corporate debt-efficient than non-debt business;(2) DES companies withmore bank debt financing, including short-term bank debt and long-term bank debtfinancing, had less to commercial credit financing, equity financing and the source offinancing is not significantly different; bank holding company debt financing and investment efficiency is higher than the sensitivity of non-bank holding company; andthe central bank’s tight monetary policies of the bank holding company’s debtfinancing and investment efficiency effects is less than the sensitivity of non-bankholding company; bank holding the company’s debt financing of the investmentefficiency of greater than non-bank holding company;(3) relative to non-debt business,debt-performance sensitivity of executive pay companies a high, and that debt-equityAfter the results of the sensitivity of executive compensation the company has alsobeen improved;(4) the profitability of corporate debt than non-debt business, butincreased earnings after debt capacity and estimates to obtain a higher market value,market investors get a higher return on investment; debt of the company’s investmentefficiency is greater than the value of the company’s positive impact on non-debtcompany. The results show that, due to the improvement and ownership structure toreduce agency costs, compared to non-debt business, debt and corporate debt financingof investment efficiency and investment efficiency is more sensitive, and the debtfinancing of investment efficiency greater impact; the same time improve thecompany’s debt-performance sensitivity of executive pay, improved profitability andthe market rate of return of investors to improve corporate value. Comprehensivesummary, due to the improvement of the ownership structure and the reduction ofagency costs, compared to the non-DES enterprise, the investment efficiency and thesensitivity of investment efficiency and debt finance of the DES corporate is higher,and debt financing plays a greater impact on the efficiency of investment; DEScompanies have improved the pay-performance sensitivity for executives and haveimproved the profitability and the market return of investors.The revelations of this paper are:(1) bank holding company formed as along-term and stable relationship between banks and trading an important way for bankcredit information for decision-making to provide a more sustainable production anduse of convenient channels, there help to improve credit allocation and the sensitivityof corporate behavior;(2) for the creditor banks holding the camera on the governancerole of corporate governance to provide more effective protection. Shareholder control,internal control is an important issue of corporate governance in China, if the bankshares, the creditors have no right either to help change the situation, but also a morebalanced corporate governance structure of a single issue.