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Study on the Governance of Debt Financing in China’s Listed Companies

Author: ZhouXueFeng
Tutor: LiuShuLian
School: Dongbei University of Finance
Course: Financial Management
Keywords: Inefficient Investment Effectiveness of Bankruptcy Threat Governanceof Debt Financing Property Right
CLC: F275
Type: PhD thesis
Year: 2013
Downloads: 15
Quote: 0
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From Williamson’s (1988) point of view, debt, rather than a tool of financing, is actually a crucial manner of governance. This has been proved and developed by follow-up studies over years. Lang et al (2000,2001)、Bolton and Dewatripont (2005) all agreed that on the basis of a complete marketing environment, debt financing would be exerting the governance role. And the way it manifests itself is to restrain inefficient investment (i.e. playing a role of debt restriction and contingent governance); to express effectiveness of bankruptcy threat; to balance the interests among different groups and to constrain invalid investment policies from managerial decision. So it will be beneficial for business value creation. However, our country has different system background from western countries. The character of property right is varied in China. State-owned and non-state-owned enterprises coexist at the same time. Moreover, interests of shareholders in enterprises are locked in conflicts. Therefore, the role of governance is functioned differently as well:the constraining power of debt financing differs in the character of property right. For most state-owned enterprises, governance through debt financing will be softened by the budget constraint. As for the non-state-owned enterprises, the inflexibility of debt financing will lead to the effective governance. In addition, since the founding, two acts regarding bankruptcy have been issued. The latest one Enterprise Bankruptcy Law was enacted in Aug,2006. This may have an affect on the effectiveness of bankruptcy threat. Hence, will this classic western debt governance theory also apply to China? Will there be special cases in China inconsistent to what described in this classic theory?This study aims to investigate whether classic western debt governance theory is appropriate to China. Based on western classic theories associate with debt financing governance and specific situation of China, this study analyzed debt financing governance by considering influences of debt financing on inefficient investment and bankruptcy threat, therefore has great theoretical and practical implications.This study is comprised of seven chapters as followed:Chapter1:introduces the background and significance of this study, defines the related concepts, elaborates the research methods, and explores the innovation and possible contributions;Chapter2:summarizes literature reviews through three aspects including the debt financing governance, the inefficient investment and debt financing, debt financing and the threat of bankruptcy effect;Chapter3:firstly, briefly analyzes the debt contract theory, and then investigates the effects of debt financing on inefficient investment based on agency theory and information asymmetry theory, and analyzes the effects of bankruptcy threat based on the debt financing guarantee theory and control theory. In addition, builds a corresponding mathematical model, in order to better understand the related theory;Chapter4:, further understands the debt financing structure of listed companies in China to begin with, then analyzes the effects on debt financing governance through following three points:soft budget constraints and political connection (of Chinese characteristic) and the effects of new and old bankruptcy laws. And finally analyzes other factors of debt financing governance effects in corporate governance, to facilitate the subsequent empirical test;Chapter5:analyzes the degree of inefficient investment in listed companies of two types of properties. And then examines the causes of inefficient investment.(A-share listed companies from2003to2011in Shanghai and Shenzhen as case studies), and then from the source of debt, uses multiple regression analysis to investigate the impacts of debt financing on inefficient investment, in order to determine whether debt financing governance is effective or not. Finally, studies the effect of political connections on the relations between debt financing and inefficient investment in listed companies of2types of properties, so as to tell the effect of political connections on debt financing governance effect;Chapter6:establishes the model for analyzing A-share listed companies of Shanghai and Shenzhen during the period2003-2011, and uses multiple regression method to examine the bankruptcy threat effect among the state-owned and non-state-owned listed companies with considering the source of debt, the debt and debt maturity test of debt financing, and then determine whether debt financing governance is effective or not. Further this chapter tests whether the implementation of the new bankruptcy law has effect on listed companies of two different property rights with regard to bankruptcy threat effect of debt financing.And deduces the effect of the implementation of the new bankruptcy law on debt financing governance effect;Chapter7:summarizes the major conclusions of this study and raises policy suggestions according to the results of empirical research, and meanwhile explores the limitation of this study and future research needs.The major conclusions and findings in this study include: (1) Overinvestment behavior of state-owned and non-state-owned listed companies is mainly because that equity agency conflict is more serious and the companies raise a lot of free cash flow; and underinvestment is primarily due to financing constraints, rather than the agency conflict between shareholders and creditors.(2) In general, the state-owned listed companies, in terms of debt financing, could hardly inhabit overinvestment, which means it is hard to play the role of debt governance. Going in details of the source, bank loans can’t inhabit overinvestment and are not able to give play to the role of governance. But because of the hard constraints, commercial credit could exert the governance effect to inhabit overinvestment. In terms of debt maturity, short-term debt is not able to inhabit overinvestment and can’t play a role of governance. Debt financing of state-owned listed company, both in terms of debt sources or debt maturity, can alleviate the underinvestment, but further analysis suggests that state-owned listed companies are able to alleviate the underinvestment, not because of the role of governance but the important role in financing. On the contrary, non-state-owned listed companies’debt in general can inhibit overinvestment and give play to the role of governance. Considering the source, the commercial credit and bank loans can play a role of hard constraints, and inhabit overinvestment play a role of governance. From the perspective of a deadline, short term debt can inhibit overinvestment, while the long-term debt, due to the relatively small proportion, couldn’t exert the impact on inefficient investment. Commercial credit can alleviate underinvestment in non-state-owned listed companies and plays a role of financing, but banks loans, as well as short-and long-term debt couldn’t achieve so. In short, the debt financing governance in non-state-owned listed companies plays a better role than that in state-owned listed company.(3) It is difficult for political connection in state-owned listed companies to make significant impacts on the relationship between debt financing and inefficient investment. The effect of political connection on debt financing and inefficient investment in non-state-owned listed companies is mainly reflected in the influence of the relationship between debt financing and underinvestment. In non-state-owned companies, comparing to those without political connections established, in companies with political connections: overall debt, bank debt and short-and long-term debt are able to significantly alleviate the underinvestment and play the role of financing. It shows that, to some extent, political connections can alleviate non-state-owned listed companies’underinvestment caused by financing constraints, but have no obvious effects on debt financing governance.(4) It is difficult for effect of bankruptcy threat to take effect in state-owned listed companies. On the contrary, it suits for non-state-owned listed companies. To dig deeper, from the perspective of source of debt, in state-owned listed companies, due to the influence of the soft budget constraint, bank loans could hardly give play to affect of bankruptcy threat. While in non-state-owned listed companies, because of the relative sensibility of debt constraints, bankruptcy threat effect of debt financing governance affects. Be it in State-owned or non-state-owned listed companies, commercial credit have fewer disturbances, so the debt constraint is relatively rigid and can give play to effect of bankruptcy threat and governance effect. From the perspective of debt maturity, short-term debt of state-owned listed companies fails to give play to effect of bankruptcy threat, while short-term debt of non-state-owned listed does. However, with regard to long-term debts, state-owned-and non-state-owned listed companies are not able to give play to effect of bankruptcy threat and debt financing governance effect. To sum up, the bankruptcy threat effect plays a better role in non-state-owned listed companies than that in state-owned listed companies. To some extent, indicates that non-state-owned listed companies’ debt financing governance is better than that of state-owned listed companies.(5) The promulgation of the new bankruptcy law could improve the situation in which debt financing in state-owned listed companies hardly gives play to the effect of bankruptcy threat. Furthermore, this can improve the situation in which bank loans and short-term debt could hardly give play to the effect of bankruptcy threat. For non-state-owned listed companies, the promulgation of the new bankruptcy law helps the exertion of bankruptcy threat effect in debt financing, particularly helps bank loans and short-term debt achieve the bankruptcy threat effect. However, with regard to commercial credit bankruptcy threat effect, the promulgation of the new bankruptcy law hardly has effect on listed companies. In short, the promulgation of the new bankruptcy law has made a positive impact on bankruptcy threat effect of debt financing of listed companies. Contribution of this study lies in the following aspects:First, this study develops a mathematical model based on debt contracts theory, agency theory, and information asymmetry theory, to investigate effects of debt financing governance for the inefficient investment. It overcomes the limitations in previous related studies, most of which are based on single theory; This study, refers to guarantee theory and control theory, builds the mathematical model to analyze bankruptcy threat effect of debt financing, which has not been done in this field.Second, this study verifies the effect of debt financing on investment, from an empirical point of view, not only by using a mathematic model to measure the degree of inefficient investment, but by examining the causes of inefficient investment. The advantage is that it can give a better and more reasonable explanation for regressive results of debt financing and the inefficient investment. The innovation of this study is that the causes of the formation of the inefficient investment are tested. In addition, from the perspective of nature of property rights, this study also illustrates the relation between debt financing and inefficient investment. Considering the political connections in different nature of property rights, the study also explores the relations between debt financing and inefficient investment in listed companies of two property types. Thus this makes it possible to locate the differences of the debt financing governance among listed companies with different property rights and probe effects of political connections on those listed companies. These innovative aspects have not been well investigated by associated previous studies yet.Third, this study first develops a regression model for examining the bankruptcy threat effect of debt financing, and tests it from the point of view of the nature of the property, bankruptcy threat effect of debt financing in state-owned and non-state-owned listed companies. In addition, this study explores influences of new "enterprise bankruptcy law", which took effect on June,2007, on bankruptcy threat effects of debt financing in of two types of listed companies. This study will fill the gap with regard to researches done by domestic scholars on debt financing governance before.

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