A Study On Aggressiveness Of Business Strategy And Debt Financing

China's economy has entered into a development model geared towards the “new normal “and the central government has set up clear macroeconomic objectives to win the tough battle of preventing and defusing major risks,and to uphold the bottom line that no systematic financial risks should happen.One of the micro guarantees to achieve these macro goals is to prevent systemic risks at the enterprise level.In this context,the aggressiveness of business strategy,which can trigger changes in business risks,has received academic attention.It has been pointed out in the literature that the more aggressive a firm's business strategy is,the more a firm is likely to overinvest,to violate the rules,and thus increasing the risk of stock price collapse.The recent debt defaults of strategically aggressive firms such as HNA,Founder,and Ziguang have also highlighted the urgency of studying corporate debt financing based on the aggressiveness of business strategy.In order to comprehensively understand the determinants,mechanism,and economic consequences of aggressiveness of business strategy on corporate debt financing,this paper examines how aggressiveness of business strategy affects the maturity,structure,and cost characteristics of corporate debt financing.Specifically,(1)to examine debt maturity,this paper combines the debt financing maturity with investment maturity.At present,the problem of “short-term loans used as long-term investment” exists in China,where the maturity of debt financing is smaller than the investment maturity.Chapter 3 examines how the aggressiveness of business strategy affects the degree of short debt and long investment and its economic consequences.(2)Examining the structure of debt financing,this paper examines in two chapters how the aggressiveness of business strategy affects the structure of debt(financial debt vs.operating debt)and the structure of financial debt(bank credit vs.bond financing).Chapter 4 examines how the aggressiveness of business strategy affects the choice of financial debt and operating debt in the debt structure.Chapter 5 examines how the aggressiveness of business strategy affects the choice of bank credit and bond financing in the financial debt structure.(3)The cost of debt capital is the result of transactions between external creditors and firms on the pricing of corporate debt risk.If the aggressiveness of business strategy affects the financial risk and overall risk of the firm by affecting the maturity and structure of debt,then the related effect must be reflected in the cost of debt capital as well.Therefore,the final chapter 6 of this paper examines how the strategic aggressiveness of a firm affects the cost of debt capital and its economic consequences.The main findings of this paper are as follows.First,the more aggressive the business strategy,the more serious the problem of mismatch between the maturity of corporate debt financing and the maturity of investment is,which is manifested by the more serious degree of short-term loans used as long-term investment.The mechanism test finds that the aggressiveness of business strategy aggravates the degree of short-term loans used as long-term investment by increasing the degree of corporate business risk,agency problems and information asymmetry.Economic consequence studies find that aggressive strategies leading to increased short-term loans used as long-term investment further deteriorates firm performance and value.However,further research finds that at the micro level,strategically aggressive firms can mitigate the extent of short-term loans used as longterm investment by improving information quality,strengthening corporate governance,and enhancing access to resources.At the macro level,improving the regional legal and trust environment and reducing economic policy uncertainty can also mitigate the degree of short-term loans used as long-term investment of strategically aggressive firms.Second,the more aggressive the business strategy,the lower the share of operating debt and the higher the share of financial debt is in the corporate debt structure.Mechanistic tests find that aggressive corporate strategies reduce the share of operating debt because aggressive strategies weaken the competitive advantage of a firm,which in turn reduces the firm's ability to obtain operating debt from its business activities.The economic consequence analysis finds that aggressive strategic firms reducing the share of operating debt further increases the firm's risk of bankruptcy.Third,the more aggressive the firm's strategy,the higher the share of bond financing is in the firm's financial debt structure.The economic consequence analysis finds that the aggressive strategy increasing the share of bond financing further exacerbates firm performance volatility.The effect of aggressive strategy firms increasing the share of bond financing is more pronounced in firms with weaker corporate governance,resource access and poorer information environment.Fourth,the more aggressive the firm's strategy,the higher the cost of debt capital for the firm.Mechanistic tests find that aggressive business strategy increases the cost of debt by raising the degree of business risk,agency problems and information asymmetry in the firm,which in turn increases the cost of debt.Economic consequence studies find that the increase in the cost of corporate debt capital due to an aggressive business strategy further damages corporate performance and value.Further analysis finds that firms' strengthening corporate governance and enhancing resource access and information transfer can mitigate the effect of aggressive strategies in exacerbating the cost of debt.The contributions of this paper are mainly in the following areas.First,it enriches the literature related to the interactive effects of operating risk and financial risk of firms.The established literature argues that by trade-off between operating leverage and financial leverage,firms can balance operating risk and financial risk,and thus keep the overall corporate risk manageable.However,these arguments do not well explain the recent debt crashes of many strategically aggressive companies.In contrast,this paper shows how operational risk and financial risk are superimposed and amplified,and better explains the possible reasons for the debt defaults of strategically aggressive firms.This paper finds that(1)the aggressiveness of business strategy exacerbates the extent of short-term loans used as long-term investment.This suggests that aggressive strategic firms are unable to effectively balance the operational risk caused by aggressive strategy with the financial risk caused by short term debt and long term investment,and thus the operational risk and financial risk are "double high".(2)The aggressive strategy weakens the competitive advantage of enterprises,reduces their ability to obtain low-risk operating debt,and increases the proportion of relatively highrisk financial debt.(3)Aggressive-strategy firms choose more bond financing to avoid bank supervision,and the lack of supervision exacerbates the volatility of firm performance.The above findings expand the literature's understanding of the interactive impact of operational risk and financial risk,while deepening the literature's understanding of how the aggressiveness of business strategy affects corporate financial risk management,which in turn provides theoretical references for more comprehensive and scientific prevention and control of corporate risk.Second,it expands corporate debt financing research from multiple perspectives.(1)It expands the determinants of short-term loans used as long-term investment of Chinese enterprises from the perspective of business strategy.The existing literature on the factors affecting short-term loans used as long-term investment is mostly from an external macro perspective or from the perspective of a single characteristic of the enterprise,lacking the examination of the overall level of corporate strategic decision making.this paper,based on a corporate strategic aggressiveness,can enrich the understanding of short-term loans used as long-term investment phenomenon in China.(2)It extends the research on debt structure and financial debt structure.The classical capital structure studies mostly explore the composition ratio of equity financing to financial debt financing and paid less attention to operating debt and debt structure.This paper finds that the more aggressive the strategy,the weaker the competitive advantage,the lower the share of operating debt and the higher the share of financial debt.(3)This paper expands the study of financial debt structure.When studying the financial debt financing of Chinese enterprises,the existing literature mostly examines bank credit alone or bond financing alone,and rarely analyzes how enterprises allocate their financial debt in a unified framework.In this paper,we combine bond financing with credit financing in the framework of financial debt allocation structure to examine how corporate strategies affect the allocation choices between bank credit and bond financing,which enriches the academic understanding of corporate financial debt financing decisions.(4)This paper demonstrates the objective reasons for the high cost of debt financing for some firms.This paper shows that the degree of strategic aggressiveness is one of the key factors determining the cost of debt.For strategically aggressive firms,it is inevitable and reasonable to bear higher debt costs due to higher operational risks,more serious agency problems,and higher degree of information asymmetry.Third,it enriches the study of the economic consequences of strategic aggressiveness of firms.(1)The existing literature has examined how strategic aggressiveness affects the size characteristics of debt.This paper complements this study by examining how strategic aggressiveness affects the maturity,structure,and cost characteristics of corporate debt.(2)While the literature has focused on how strategic aggressiveness affects the risk of stock price crash risk in the capital market,this paper extends the study from the capital market to the real economy and finds that strategic aggressiveness directly affects firm performance,value,and risk by influencing many characteristics of corporate debt financing.