"Lower Leverage Puzzle" In China's Listed Companies

The study of capital structure has been hot and focus in financial research. Since the MM theorem, the development of capital structure theory has been getting more sophisticated, and formed many theories such as the trade-off theory, agency theory, signaling theory, pecking order theory, control theory. However, when foreign and domestic scholars studied capital structure, they often overlooked the fact that the degree of development of capital markets. Therefore, this article aims to understand why there are so many listed companies in China with low or even zero long-term liabilities, but have high efficiency.This phenomenon does not match with the existing capital structure theory, and the long-term liabilities of listed companies in China have great distance with developed countries' listed companies. Based on the reality of the initial stage of China's security market and the financing environment of listed companies in China, and use firm efficiency to be the composite index of firm operations, we begin to analyze the "confusion".First, this paper measures the Shanghai-listed companies'efficiency during 2004 to 2008, by using the stochastic frontier analysis (SFA) method. The empirical results show that the average efficiency of Shanghai-listed companies is 82.68%. On this basis, this paper put emphasis on exploring the relationship between firm efficiency and capital structure of Shanghai-listed companies, in the context that Shanghai-listed companies existing universal low or even zero long-term liabilities phenomenon, efficiency level is exponentially related to capital structure. While the long-term liabilities ratio increases, the efficiency of the firm decreases at growing slower speed. Particularly, the efficiency will be maximized if the long-term liabilities ratio equals to zero, that is entirely financed by equity. Our results also show that, the phenomenon that listed companies with zero long-term liabilities but high-efficiency is not Chinese capital market's "vision", but the inevitable outcome of the initial stage of the security market. And existing capital structure theories are failure to explain the puzzle of China's capital market. Besides, security market at different stage of development, capital structure has different connotations, that is, when security market at her early stage, the capital structure researches should focus on the choice of equity financing or debt financing, but when the security market in her mature stage, the capital structure studies should focus on the issues about the determining of optimal capital structure and factors of capital structure. So this paper advices that, first, the development level of capital market and security market should be considered to the study of capital structure theory; second, we must strengthen the development of security market, thereby reducing the transition time of security market from initial stage to mature stage.