Capital Structure, The Net Benefits To Leverage And Corporate Characteristics

Theory of capital structure is the core theory of corporate finance. In general, capitalstructure refers to the proportion of the owner’s equity and the debt, also viewed as thefinance structure or leverage ratio. The intention to analyze the capital structure is toadjust the irrational capital structure by financial management, utilize the debt leverageto reduce the enterprise’s capital cost and finance risk, enhance the ROE (return onequity) and then improve the value of enterprise and finally get the optimal capitalstructure balancing return and risk.In recent years, the Chinese enterprises were affected by the international financialcrisis, given the background of the current inflation risk in China and the tighteningmonetary policy, a natural question is how the macro impact and microscopic features ofdifferent financing constraints may affect company’s financing decision? How capitalstructure varies with the characteristics of the company? The study of these issues hasimportant theoretical and practical significance.This paper is based on capital structure theory, and explores macroeconomic factors,industry and firm characteristics which affect the listed companies’ financial decision.The empirical study uses panel data to find out the relationship between capital structureand firms characteristics of Chinese listed companies, especially how net benefit toleverage varies with capital structure, profitability, market-to-book ratios, non-debt taxshields, capital characteristics, operational risks and firm’s characteristics. I use a sampleof715firms across12industries’ quarterly data from2006to2011,and a Markov ChainMonte Carlo (MCMC) algorithm to explore the relationship between the capital structureand firm characteristics by firm’s market value, systematic risk（beta）and net benefit toleverage.The results show that firm characteristics affect the capital structure. Those firms with low non-debt tax shields, stable profits, low market-to-book ratio and highprofitability have higher net benefits to leverage. Estimates of the posteriori standarddeviations of the parameters are significantly small. There are no dramatic seasonalchanges in the sampling track path of each parameters, which means the Markov chainconvergence. The estimation results also show further validation on the nonlinear effectsof leverage on the expected net benefits to leverage.