The Substitution Effect Between Corporate Governance Mechanism And Short-term Debt Under The Managerial Entrenchment

Corporate finance has been one of the issues of the focus of scholars. Enterprises in the financing structure involves not only the choice between equity and debt, but the various parts of the internal structure such as the debt maturity structure. Different term of the debt each have advantages and disadvantages. Enterprise how to make a choice between long-term and short-term debt, and select the proportions.of long-term and short-term debt respectively,what related to enterprise's development in the future. Short-term debt has certain corporate governance functions of giving senior management the hard constraints imposed by debt service in order to curb their opportunistic behavior. And good corporate governance can help enterprises make the right debt maturity structure decisions. When the corporate governance mechanism is able to constraine senior management and reduce agency conflicts, it can be a useful alternative to the use of short-term debt, which can reduce the risk of bankruptcy. In addition, in the modern enterprise, senior management are not passive objects of governance. Their motivation to make them stick to position let them use their own discretion of the company to actively defend the behavior of threating their own interestsf especially the stable position, and those defensive behaviors can have an impact on the effectiveness of corporate governance and the choice of debt maturity. In recent years, some scholars start on the relationship between the debt maturity structure and corporate governance, also on the managerial entrenchment issues. But few scholars consider the combination of the three studies especially Chinese scholars. So this paper based on the special institutional background in China, discusses the the substitution relationship between corporate governance mechanism and short-term debt,and the influence of managerial entrenchment to the substitution relationship, that has an important theoretic and realistic significance.This paper, based on the correlation theories and the specific conditions in our country, takes the balance panel data of the 384 listed non-state manufactures of 2007-2009 as research samples. A model is developed, using mixed least-squares regression, to study empirically the substitution effects between the corporate governance mechanism and the short-term debt from some aspects, such as supervision mechanism of corporate control market, the largest shareholders control, incentive to management, the Supervisory Board and Board and so on. This paper apply the factor analysis method to synthesis the managerial discretion index to represent the degree of managerial entrenchment.and study how the managerial entrenchment influence the substitution effect between corporate governance mechanisms and short-term debt. The empirical results show that:(1) There is a substitution effect between corporate governance mechanisms and short-term debt ratio, that is. when corporate governance is better and can restrain the behavior of executives, the company will reduce the use of short-term debt; but when the poor corporate governance mechanisms can not effectively constraint the management, the company will increase the use of short-term debt ratio.(2) In the effect of managerial entrenchment, when the company changed for the better governance mechanisms need to reduce short-term debt, due to defense managers have a higher discretion and defense motivation, the short-term debt ratio reduced by the company will increase.(3) Relative to the listed companies of a lower level of managerial entrenchment, in the listed companies of a higher level of managerial entrenchment, the sensitivity of alternative of the short-term debt to corporate governance is weaker, that is, when the corporate governance mechanisms become poor and need to increase short-term debt ratio, due to the higher discretion and defense motivations, the proportion of short-term debt that the company increased becomes less. Therefore, improving the level of corporate governance of listed companies, establishing effective incentive and restraint mechanisms to inhibit the managerial entrenchmentand developing diversified financing market system,have an important role for listed companies to optimize the debt maturity structure.