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Study of Corporate Governance in Corporations with Borrowings

Author: WangXiaoMeng
Tutor: LiuYinGuo
School: Anhui University of Finance
Course: Accounting
Keywords: debt financing free cash flow corporate governance
CLC: F275
Type: Master's thesis
Year: 2014
Downloads: 17
Quote: 0
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Abstract


In the process of development, when owners of modern corporations hand over the agency of the company to managers as they cannot entirely control the development of the company, principle-agent relationship occurs. But the information asymmetry between the principle and the agent results in cost of agency, so how to resolve this issue has become the emphasis of study in the current stage of corporate governance. It is said that only by incorporating the optimal financing structure into corporate governance can best performance be produced in the process of governing the corporation. Currently, debt governance, which referred to governance of corporations with loans, has become a preferred standard when corporations are considering financing structure. Williamson(1988) regarded debt mainly as a governing structure rather than a financial tool, and he claimed that debt as a means of external financing could be an effective corporate governance regime. Debt governance can restrict behaviors of managers, thus reducing cost of agency. According to Jensen(1976)’s free cash flow hypothesis, cost of agency may occur when companies have large free cash flow. Therefore, debt can have controlling effects as a hard restriction, an effective way to reduce free cash flow and cost of agency. However, it’s common that Chinese companies mostly have high debts but low performance. So based on western theories, this essay will test whether debt has a governing effect on Chinese listed companies, if any what effects are, whether the governing effects work under our system, whether it will lower high free cash flow and its cost of agency. If governing effects exist, whether our corporations has fully utilized the role of debt. If not, what measures and improvements in systems can be employed to strengthen the influence of debts on our corporate governance.On the basis of financing structure theories, free cash flow hypothesis and other related theories, this essay reviews the methods of empirical research, studies debt corporate governance in Chinese listed companies from the perspective of free cash flow, divides it into free cash flow effects and in-office consuming effects, and through studying the relationship between debt and free cash flow, corporate performance and managers’in-office consumption, coming the conclusion that debt governance in our companies is weakened. Suggestions and recommendations are given at the end of the essay based on the conclusion.This essay will discuss the following aspects. First, to test whether large free cash flow and cost of agency exist in our listed companies. By descriptive statistical analysis, it is commonly found that high free cash flow exist in our listed companies, high debt co-exist with low performance in many of them and cost of agency is a common problem. Second, to test the relationship between debt, free cash flow and corporate performance. By modeling and empirical research, it is found that there is a reverse relationship between debt, free cash flow and corporate performance, which means debt didn’t play its role of controlling, so the free cash flow effects of debt is weakened. Third, to test the relationship between debt and in-office consumption and study how debt affect managers in-office consumption to eventually influence corporate performance. By regression analysis and path analysis, the relationship between debt and performance is reverse, which means changes in debt lead to changes in in-office consumption, resulting in the opposite movement of corporate performance. This also indicates that in-office consumption of debt is weakened. Forth, by combining previous theoretical research and associated empirical research, this essay explains the reasons of weakening effects of corporate governance and make proposals regarding how o improve debt corporate governance.This essay’s main innovation points embodied in:First, based on the perspective of free cash flow and the agent cost theory, this paper combine free cash flow, debt with corporate governance efficiency, further widening the perspective of corporate governance of listed company and domain. Second, in the respective of theory, corporate governance is further divided into free cash flow effect and on-the-job consumption effect, and reflected in the empirical study, which is a new attempt. Third, this paper mainly caught two aspects to research in improving corporate governance mechanism optimization liabilities, one is to optimize and improve the mechanism of the bankruptcy, the other is to play a positive role, led by banks and the other financial institutions. These two aspects for liabilities governance mechanism of sound has played a vital role. Fourth, in considering that our country’s system background is different from western countries, therefore, in assuming the effect of debt financing governance of listed companies in our country when combined with the actual situation of listed companies in our country, and not biased, just refer to the study of the theory of the western scholars literature, but fully combines the relations between debt financing and corporate governance of our country actual situation proposed the hypothesis of the thesis.

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CLC: > Economic > Economic planning and management > Enterprise economy > Corporate Financial Management
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