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A Study on the Relationship Between Capital Structure and Performance of the Listed Companies in China Through Different Groups with Various Factors

Author: LvZuo
Tutor: LuZuo
School: Nanjing University of Aeronautics and Astronautics
Course: Finance
Keywords: capital structure corporate performance endogeneity classification with various factors panal data
CLC: F276.6;F224
Type: Master's thesis
Year: 2009
Downloads: 151
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Abstract


The theory of capital structure has always been the focus and one of the most controversial issues in financial academics and practices.The MM theory supposes that a firm’s capital structure is not correlated with its market value with the condition that there are no trade cost, tax and information asymmetry. The MM theory just describes the ideal status. From then on, many scholars have furthered the study, and they find that there is nearly relationship between the capital stucture and firm’s market value.International and domestic scholars have conducted a lot of researches on the relationship between capital structure and operating performance. There were two distinctively different conclusions of those studies: One is that there was a positive correlation between the capital structure and the performance of the firms, and the other is just the opposite, showing that there was a negative correlationship.The two completely different conclusions bring us much confusion, so it deserves our continued research.This paper first reviews the capital structure theory, and summarizes the related research literature at home and abroad. Then we conduct an empirical study on the factors affecting capital structure and the relationship between capital structure and corporate performance, combined with the actual situation of China’s listed companies. Since the capital structure and corporate performance are mutually interactive, that is to say, capital structure influences corporate performance, while it is also influenced by performance. Therefore, the paper estimates the multivariate linear model through the two-stage least-squares method (2SLS), considering the issue of endogeneity. The empirical study on the factors affecting capital structure shows that: company size, growth, profitability and other elements are among the most important factors which have siganificant influence about capital structure. And the study on the relationship between capital structure and corporate performance suggests that: the overall performance of China’s listed companies has a negative relation with their capital structure. Given the interaction between them, we find that traditional method overestimates the impact on capital structure exerted by corporate profitability, while the influence exerted by capital structure on performance has been underestimated. The paper has also studied the correlation between the two through different groups which are divided by the disparate capital structure choice preference and by the distinct growth opportunities. The conclusion of the empirical analysis suggests that: the impact of capital structure on corporate performance are significantly distinctive if the sample companies are divided by disparate capital structure choice preference and by the distinct growth opportunities. In the end, the paper puts forward several advices for optimizing the capital structure and improving the operating performance of China’s listed companies. And also, it points out the shortcomings in the research and the issues which are needed to discuss in the future.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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