An Empirical Analysis On The Effect Of Asset Specificity On Enterprise's Capital Structure

Capital structure determines the contract between the capital owners themselves and between the capital owners and the other parties at interest; it has close relations with corporate governance and corporate value. So how to arrange the capital structure has become one of the most important strategic decisions in a company. Analyzing the possible factors that influence capital structure also is a key point of financial study. In this paper, we take the asset specificity in consideration.The studies in western countries suggest that the asset specificity is an important factor which influences the company's capital structure. But it is lacking in studies in China, Compared with foreign studies, there are some shortages in the theoretical analysis, the selection variables, the sample and the methods in China. Based on the previous studies, this paper makes some improvement in these aspects and does some further studies.First of all, this paper analysis the path that the asset effects the capital structure, the governance mechanism of debt and equity change as the asset specificity increase, and then, the cost of debt and equity capital get changed, so the optimized capital structure gets changed. We got the theoretical conclusion by creating the model "cost of capital". The conclusion is the asset specificity and the capital structure has negative correlation. When the degree of asst specificity is increased, the share of equity financing would increase and the debt financing would reduce.Using cross-sectional observations of companies listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange from 2003 to 2006, totally 38 companies and 152 groups of panel data. The empirical study examines the relationship between the asset specificity and capital structure. Asset specificity is measured in terms of two ratios, Income of principal operations to total income and intangible assets and selling expense to total assets. Result shows that asset specificity has insignificant positive influences on the gross debt ratio after controlling from size, growth, ROA and STR.When the degree of asst specificity is increased, the share of equity financing reduce and the debt financing increase. The theoretical and empirical conclusion are different from each other. The causes of the difference are explained at the end of the paper, and also some suggestions.