Liquidity And Capital Structure: Model Construction And Empirical Test

Liquidity and capital structure have always been two hot issues in finance. The selection of capital structure reflects the configurations of company’s different sources of funding, which is critical to enterprise value. Theorists do active discussion on the factors affecting capital structure, however, past studies ignore the impact of some existing outside macro and micro factors on capital structure. For this situation, the paper does theoretical and empirical analysis on the impact of liquidity on the capital structure of listed companies in China, from the perspectives of macro monetary liquidity and micro market liquidity.In the theoretical analysis, this paper first reviews the development of the capital structure theory, and point out the shortcomings of the existing capital structure theory. On this basis, combined with the relevant theory basis of capital structure and liquidity, this paper constructed the theoretical model describing how monetary liquidity and market liquidity affect capital structure, through extending monetary demand theory and liquidity premium model.In the empirical analysis, this paper selected the listed companies in Shanghai and Shenzhen A-share market from 2009 to 2013 as samples, and uses individual fixed effects panel data model, empirically researching on the impact of liquidity on capital structure of Chinese listed companies, respectively from the two perspectives of monetary liquidity and market liquidity. The results show that the more ample monetary liquidity, companies are more inclined to debt financing, thus leading to higher financial leverage; The higher the market liquidity, the lower the cost of corporate equity financing. Thus, corporate prefer equity financing, resulting in lower financial leverage, which is consistent with the theoretical analysis. Next, this paper finds that there is significant endogeneity between market liquidity and capital structure, the two influencing each other, reinforcing each other. This paper uses the two-stage simultaneous equations model to control the endogenous impacts, and empirical results still support theoretical assumptions. In the empirical process, this paper also selects manufacturing companies as sub-sample of robustness tests, and the results of the sub-sample are consistent with the overall sample. Finally, this paper, based on the theoretical and empirical analysis, put forward corresponding recommendations for corporate financing strategy, market building and financial regulatory, referring to the advanced experience of foreign mature markets.