The Research Of Financing Preference Of Listed Companies In China At The Behavioral Finance Perspective

Since the establishment of Shanghai and Shenzhen Stock Exchange, China's capital market has experienced the development for nearly two decades, and the number and size of listed companies both had a tremendous growth. Meanwhile, the financing and capital structure of listed companies are showing unique features. The scale of equity has been showing a strong growth trend, but the corporate bond market developed slowly. According to the statistics, the size of the bond financing of all listed companies in 2010 accounted for only 11.67% of the size of the equity financing. The financing choice behavior shows a clear preference of equity.According to the Pecking Order Theory (Meyers and Majluf,1984, also known as the Pecking Theory), Enterprises should use internal capital first; and then issue bonds or extend credit from banks, and finally issue shares to the public. Also, this theory has been confirmed by the empirical test based on the data from developed countries. But, the current situation of China is contrary to this theory. The main purpose of this paper is to explain the reason why this paradox occurs at the behavioral finance perspective.This thesis is totally divided into six parts:At first it introduces the significance of selecting this topic at the background of the sharp contrast between the huge development of the stock market and the slow development of the bond market. The objective of the research is to explain the formation mechanism of equity preference using the Behavioral Corporate Finance theory, and the research has its theoretical significance. Then, the establishment of a more comprehensive research framework in the study of equity financing preference shows its practical significance in China. Finally, the study of the financing behavior under the interaction mechanism between irrational investors and irrational managers is also meaningful and which can be the innovative point of this article.The second part describes several theories of corporate finance and the related researches. This section details the basic assumptions and some related theory of Behavioral Corporate Finance, which is an important branch of Behavioral Finance. This emerging research direction follows the basic assumptions of Behavioral Finance, but classifies irrational people into irrational investors and irrational managers while researching company's financial activities. It belongs to traditional finance when the investors and managers are both rational, and we can attribute efficient market to information asymmetry or agent problem. In the case that managers are rational but investors are irrational, the influential theory of corporate financing decisions is Market Timing Theory (Stein,1996). When investors are rational and managers are irrational, the research perspective turns into that managers'overconfidence or excessive optimism may lead to what kind of results.The third part is an empirical test about the current situation of financial structure in Chinese companies. The number and size of listed companies increase rapidly recent years, and IPO of stock market hit a record in 2010. After comparing the size of the A-share market and the scale of corporate bond, we can draw the conclusion that companies prefer equity financing. For several financial ratios, compared to the ratio of some specific developed countries, the average equity ratio is higher. And the proportion of companies which equity ratio is above 50% is higher than the proportion in specific developed countries as well. To summarize, two conclusions can be drawn:listed companies in China have a strong preference for equity financing, and equity financing has a strong tendency of the timing.As a core part, part four discusses what factors caused the equity financing preferences of listed companies in China, based on the classification of the Behavior Corporate Finance above. First of all, under the assumption that the investors and managers are both rational, based on the Asymmetric Information Theory, the main cause of shares preference is that the low cost of equity financing which included the information asymmetry cost and the agent cost. Compared to this, the cost of debt financing is much higher due to the underdeveloped bonds market. Secondly, we reach the conclusion that the stock price is often overvalued in China, under the assumption that managers are rational but the investors are irrational. The generation of this kind of phenomenon is mainly due to:l.The Market is filled with irrational investors which are making irrational decisions; 2. Herd behavior enables the irrationality to expand among the investors; 3. The price cannot display the real value due to the lack of short mechanism and the limitation of arbitrage mechanism. According to the Financing Decision-making Mode (Baker, Ruback and Wurgler,2002), when the stock price is overvalued, the rational decision-makers tend to issue more shares for getting extra profit. These are the reasons for the shares preference under the second assumption. Thirdly, assuming that investors are rational but the managers are irrational, the conclusions in part three are contrary to empirical test based on the mature foreign market. The article here lists two possible reasons, one is the selection of alternative variables, and another is the non-establishment of the rational market hypothesis. For the first aspect, this article selects several factors with Chinese characteristics to discuss the reason which causes the paradox, such as the political motives, the short-term interests motive, the maintaining its own control power tendency, and the government favoritism. And finally, for the second aspect, the article assumes that the investors and the managers are both irrational, and then discusses their interaction mechanism. Meanwhile it also provides a more complete and systematic explanation of equity financing preference.The fifth part follows the study framework above and puts forward several proposals for improving the financing structure of listed companies. Here are some recommendations for changing the situation of asymmetric information:1. Improve the capital market development, and diversify financing channels; 2. Strengthen the enterprise supervision and the internal information disclosure; 3. Clear the property rights of companies, and enhance the constraints of shareholders' internal oversight. In order to reduce the irrational behavior of investors, the paper puts forward several measures:1. Strengthen investors' education to improve their rational decision-making ability; 2. Improve degree of marketization of the securities market; 3. Establish an effective mechanism for stabilizing the stock market; 4. Develop institutional investors. For reducing managers' irrational degree, the paper comes up with three advices:1. Improve the internal incentive mechanism of listed companies, and pay more attention to the influence of the psychological contract on managers' behavior; 2. Set up an effective internal control system, for perfecting the corporate governance structure; 3. Establish effective external constraint mechanism and a manager market competition mechanism.The final part summarizes the main conclusions and points out the inadequacy of this paper. In the discussion of the irrational managers, some influential factors may have been omitted. And the impact of non-existence of these factors has not been tested yet. However, these issues can also be possible directions for the future research.