The Impact Of The Financial Flexibility On Capital Structure Adjustment Speed

Research on capital structure has been very popular in the financial sector of moderncompany. The situation of capital structure affects not only the cost of capital and companyvalue, but also the company governance structure, behavior of managers, furthermore, thecountry’s economic growth and stability. Financial flexibility, as a comprehensive indicator ofcompany financial situation, is drawing increasing attention of researchers in financial field.The situation of a company’s financial flexibility is bound to affect its financial decisions andthe adjustment of capital structure, and affect its adjustment speed of capital structure as well.The study of the impact of financial flexibility on the adjustment speed of capital structurehelps optimize capital structure, improve operation efficiency and maximize company value.This paper has selected the panel data of the A-share listed companies in Shanghai andShenzhen from2007to2012. Based on the dynamic model theory of capital structure andmainly with the help of Spss19and Stata11softwares, we have explored the impact offinancial flexibility to the capital structure adjustment speed using the fixed effects OLSregression method, and have made proposals for enhancing their financial flexibility andoptimize their capital structure.The main conclusions and contributions are as follows：Firstly, the financial flexibility index of the A-share listed companies in Shanghai andShenzhen from2007to2012averages about0.0073, which is very low overall.Secondly, the results support the dynamic trade-off theory, which means there exists atarget capital structure in China’s Shanghai and Shenzhen A-share listed companies.Thirdly, the deviation of the actual capital structure from the target capital structure islarge and there are "tendency" and "departure" when the actual capital structure adjusts to thetarget capital structure.Fourthly, Shanghai and Shenzhen A-share listed companies face higher adjustment costs,and its mean absolute value of the capital structure adjustment speed is0.1, which is very low,as well.Fifthly, financial flexibility plays significantly positive effect on the capital structureadjustment speed of the companies. From the eye of the industry distribution situation,financial flexibility and capital structure adjustment speed of monopoly industries are higherthan those of competitive industries; from the view of time distribution, the financialflexibility first increases then slides, while the capital structure adjustment speed drops afterincrease first; Geographically speaking, there are significant regional differences in the impactof financial flexibility to Chinese listed companies’ capital structure adjustment speed, andthat of the eastern region is more obvious.Finally, policy recommendations from the internal governance and external environmentconstruction are proposed.