Capital Structure, The Cost Of DEBT And Competition

With the rapid development of corporate finance theory, the relation between capital structure, cost of debt and product market competition receives more and more attention. As most previous researchs on this issue just consider the imapct of capital structure on the market, and they don’t deep into debt. Therefore, research on this issue has a very important theoretical and practical significance. It makes for understanding more about capital structure and debt pricing, provides decision references for firms.The data is from China A-shares, classified by CSRC manufacturing sub-sectors, and this paper combines theoretical analysis and empirical method. By introducing regression model, this paper checks that how competition affects capital structure and the cost of debt. It’s worth mentioning that debt theory deeps capital structure, they jointly improve the corporate finance. The main conclusions are:(1) The market competition and capital structure of firms in various industries are different obviously. Metal and nonmetal industry has the highest debt-to-assets ratio and the fatio of electronics industry is smallest. The petroleum, chemical, plastic market is most competitive, paper and printing market is relatively less intense. (2) Market competition and capital structure is positive correlation. The more intense the market competition, the higher the debt-to-assets ratio and the larger the firm, the stronger the profitability, the lower the debt-to-assets ratio. The sub-sector conclusion further confirms the postive relation between competition and capital structure. (3) Market competition and cost of debt is positive correlation. The cost of debt is systematically higher for firms that operate in competitive product markets. This effete will be bigger as frim becomes smaller and debt-to-assets ratio, default probability becomes larger. Overall, it emphasizes the linkage between product market and financial market.The improvement and innovation of this paper is mainly reflected in the following aspects. First, this paper considers the effect of industry stays higher level than others, it can reflect combined effects. And there is a stable relation between product market competition and capital structure. Second, this paper shows combination of part and whole, it has both global analysis of the impact of competition on capital structure and uniqueness analysis of different sectors. So, it ensures the rigor and comprehensive of the thesis. Third, previous literature considers little about the impact of competition on cost of debt, this paper tries to explore this issue in much greater detail. Moreover, the classification by default probability makes the result more persuasive.