The Capital Structure Decision for Listed Real Estate Companies

Capital structure is a popular subject among corporate finance studies. Researchers at home and abroad have made many researches on capital structure, and then got many capital structure theories in which the most well-known was the MM theory of capital structure. MM theory’s assumptions are so strict that it does not apply in the real conditions. In recent years, research on capital structure is more focused on the trade-off theory, agency theory, Pecking Order theory and Market Timing theory. Among them, the trade-off theory and Pecking Order theory are two influential theories in modern capital structure theories. Researchers have often made comparative studies on these two theories, evidences support for these two theories were drawn from many empirical research.So far, however, literatures that made systematic study on capital structure decisions of listed real estate companies are not too much. Most researches on the financing behavior of listed real estate companies are staying on the understanding of relying entirely on bank borrowings. This paper selected63real estate companies listed in the A-share market in Shanghai Stock Exchange and Shenzhen Stock Exchange as a research sample, based on financial data from2001to2010, made an empirical research on the two main theories, which are Pecking Order and the trade-off theory, to explain the corporate capital structure decisions during listed real estate companies, to study the financing behavior and financing preferences of real estate companies. The results show that:the financing behavior of listed real estate companies does not meet the expectations of the pecking order theory, but basically coincide with the expectations of trade-off theory. Therefore, China’s real estate company has a target capital structure, they have no definite preference of financing options order, and decisions are made by comparing the costs and benefits of various financing methods to achieve the target capital structure.