An Empirical Study Of The Relationship Between Capital Structure And Performance For Chinese Listed Companies With Different Growth Opportunities

With the development of China's capital market, the performance of listed companies became the focus of people's attention. Numerous researches were conducted on the relationship between a company's capital structure and its performance, yet no consensus has been reached. Conclusions received from independent studies can be quite different from one another, sometimes even at opposite directions.This paper introduces the concept of growth and analyzes the relationship between capital structure and performance for companies with different growth prospects. A company has to go through different stages of growth from inception to its later expansion. Capital demand of companies at different stages can vary greatly in nature and quantity. Therefore, to analyze a company's growth prospects can be quite helpful in regarding to identifying this company's competitive market position and development trend, as well as providing references for long term operational decision making. Companies with different growth prospects have different financing demand, as a result, a company's growth prospect has to be considered while choosing its capital structure, in order to increase this company's market value.After reviewing relevant theoretical and empirical literatures, this paper attempts to verify two hypotheses: Hypothesis 1, capital structure and operation performance are positively correlated, regardless of a company's growth prospects; Hypothesis 2, for companies with good growth prospects, debt has a negative impact on performance, and for companies with poor growth prospects, debt has a positive impact on operation performance. Based on these hypotheses, empirical study is designed and executed.This paper chooses companies listed in Shanghai and Shenzhen Stock Exchange from 2005 to 2009 as research objects. According to a certain criteria, 763 listed companies are chosen with 3815 valid samples. First, this paper uses factor analysis to calculate the composite scores of growth, capital structure and operation performance of the sample companies, and then with the help of panel threshold model, three variables:company size, stock liquidity and fixed-asset ratio are added as control variables to conduct regression analyses to divide sample companies into four types regarding to its growth prospects:low-low, medium-low, medium-high, high. After this, through empirical analysis, this paper concludes that for companies with good growth opportunities, debt has a positive impact on operation performance, and for companies with poor growth opportunities, debt has a negative impact on operation performance. This is completely opposite to the classical agency cost theory. This paper then gives an explanation of the results reached above based on the realities of China's listed companies and proposed several suggestions to reduce agency costs between shareholders and managers.