Relations between Capital Structure and Corporate Performance from Corporate Governance Perspectives
|Keywords||State-owned Largest Shareholder Financial Leverage Corporate Value Simultaneous Equations Subgroup Test|
Relations between capital structure and corporate performance have begun to be studied since 1950s. One of the most influential literatures is H. Modigliani & M. H. Miller’s paper of The Cost of Capital, Corporation Finance and the Theory of Investment, the famous MM model, which formed the foundation of modern capital structure theory. Western financial economists have also put forward different models based on capital market realities, such as Trade-off Theory, Agency Cost Hypothesis and Pecking Order Theory. But there has been no satisfactory solution after several decades’ research in this field. On the other hand, Jensen & Meckling (1976) applied contract theory and agency theory in their study on capital structure, and analyzed the relations between capital structure and corporate performance from corporate governance perspective. They found that debt contracts could reduce agency costs of free cash flows and thereby improve corporate performance by forcing managers to comply with commitments for paying cash flows in the future. So the choices of corporate capital structure have an important impact on the efficiency of corporate governance, and the design of optimal capital structure to maximize corporate governance performance and the relationship between the two have become the focus of academic research.However, recent literatures suggest that ownership concentration of listed companies on the emerging markets is significant and the traditional conflict of interests between shareholders and managers has changed into one between blockholders and minority shareholders, creditors, and other stakeholders, which means that the equity structure optimization becomes the key of improving corporate governance performance. In China, the defects in the aspects of capital structure and corporate governance are especially more prominent for the special period of economic transformation of its capital market: the state-owned listed companies’ widespread preference of equity financing due to their stake dominance, coupled with the long-term existence of non-tradable shares and asymmetric information, resulting in large amounts of adverse events such as disclosure of false information, major shareholder’s occupation of corporate funds, security breaches, related transactions and extraordinary dividend distribution, etc., which all shows interest conflicts of major shareholders against minority shareholders in listed companies and has become one of the major governance problems facing China’s listed companies. Therefore, it is of significance for this thesis to explore effective governance mechanisms of restricting major shareholders’ behavior to achieve optimization of capital structure of listed companies, prevention of major shareholders’ predatory violation of minority shareholders’ legitimate rights and protection of interests of creditors and other stakeholders. And the thesis constructs an interactive model of corporate governance, ownership structure, debt structure and corporate performance of listed companies for statistical analysis so as to highlight relations between capital structure and corporate performance from governance perspectives along the main line of debt financing governance.This research consists of seven chapters. Chapter one which is an introduction part mainly focus on the basis of the selected title and related definition, introduces relevant concepts, ways of thinking and method studies, and last but not least recommends the thesis structure and its possible innovation. Chapter two is related literature review and comment. A more systematic review of relevant literature of the thesis is given on the basis of clarifying the intrinsic link between capital structure, corporate governance and company performance, which illustrates specified direction for the follow-up theoretical interpretation and empirical analysis. Chapter three is a game analysis on the relations between capital structure and corporate performance based on a discrete game model of financial contract theory, in which the decision-making process of major shareholders, managers and creditors is interpreted in an expansive context of game analysis, highlighting the role of debt financing governance in the binding constraint of manager and major shareholders. And the effect of company’s financial leverage in governance mechanisms is summarized at the end of this chapter. Chapter four is the construction of statistical models and the designing of relevant variables, in which an overall framework is proposed of ownership structure, debt structure, internal governance and corporate performance based on the analysis of inadequate problems in recent empirical studies, and then variables used in the following empirical analysis are specifically defined and their statistical features described. Chapter five is the empirical results and analysis of single equation OLS tests, in which regression analyses are made respectively on the models proposed in chapter four and a factor analysis on internal governance variables is done. Significant equations of company performance, ownership structure and debt structure are selected at last as the basis of simultaneous equations in next chapter. Chapter six is the empirical results and analysis of simultaneous equations 2SLS test, in which two-stage least squares method is used to do overall samples regression estimation followed by subgroup comparison analysis in order to test corporate performance differences of different equity identities, based upon identifying and Huasman testing for simultaneous equations extracted from Chapter five, providing empirical support for the next chapter’s Countermeasures proposed. Chapter seven is the basic conclusions and relevant proposals, which is expected to help to optimize capital structure and improve corporate performance of listed companies in China, followed by future research prospects combined with research limitations of the thesis.